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Investing.com - Goldman Sachs is maintaining its bullish outlook on the Euro despite recent political developments in France that briefly pressured the currency.
French Prime Minister Michel Bayrou announced Monday a confidence vote scheduled for September 8, which major opposition parties have indicated they will vote against, likely forcing the prime minister to step down. Prediction markets now show over 95% probability that Bayrou will be ousted by year-end.
Goldman Sachs analysts note that historically, Euro area political risks impact the currency only when there are clear signs of contagion or lasting effects on real economic activity, both of which they consider unlikely in the current situation. The bank’s economists have left their growth forecasts unchanged and only marginally raised their deficit target for next year.
Following the announcement, the Euro weakened more than typical reactions to OAT-Bund spread widening would suggest. Goldman attributes this to several factors: spread widening in core economies like France tends to impact the currency more than peripheral spreads, political volatility amplifies spread effects, and investors likely unwound some EUR/USD long positions.
Despite these developments, Goldman Sachs maintains that risks to the Euro are limited and outweighed by developments in the US that continue to pressure the Dollar, ultimately expecting the Euro to strengthen further.
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