From time to time, as part of market comments, we take a look at what the world's largest financial institutions think about the current situation on the financial and currency markets. This time we look at the opinion of Morgan Stanley and Goldman Sachs about the Fed and the EUR/USD.
According to Morgan Stanley, whose report is quoted by Bloomberg, the new framework for determining average inflation by the Federal Reserve (as announced by Fed Chairman Jerome Powell at an online conference) should lead to higher inflation, which in turn will allow the Fed to raise rates in the first half of 2024 or earlier, and the Fed's balance sheet will start to decrease around mid-2022.
The Fed is more likely to achieve the inflation target in this cycle, which supports Morgan Stanley's view, which is not in line with the consensus on higher inflation, writes Ellen Zentner, chief U.S. economist, in a note. According to many market participants, the current pumping of money into the financial system may not translate into price increases in the wider economy, because despite the increase in money supply, its circulation in the economy is shrinking. The examples of Japan or the Eurozone also did not indicate a combination of the central bank's balance sheet total with inflation.
According to the MS Fed, it will strive to exceed inflation during the economic recovery, expecting to reach the average inflation target of 2 percent in this business cycle, a result underestimated by the markets.
As a result of higher inflation and no changes in interest rates, real interest rates on US bonds or the dollar may be even more negative, which may trigger another wave of USD sell-off.
The Goldman Sachs bank seems to have of a similar opinion and wrote that the euro seems to be well-positioned for a further broad weakness of the US dollar. The ECB expressed only limited concerns about the recent appreciation of the euro. This was not a firm position of the central bank. Thus, according to Goldman Sachs, the euro remains underestimated and its long-term fair value is at 1,3000.
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