Goldman doubles down on calls to short the euro ahead of ECB

The ECB will aggressively expand stimulus to help weaken the euro, analysts say

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Goldman is once again calling for the European Central Bank to surprise investors with a larger-than-expected expansion of its stimulus measures.

A team of currency strategists at Goldman Sachs is again calling for the European Central Bank to deliver a surprisingly dovish expansion of its easing regimen on Thursday — despite getting burned by a similar call three months ago.
The team, led by chief currency strategist Robin Brooks, believes the ECB will need to act aggressively on Thursday if it wants to jolt the eurozone out of its deflationary spiral and help push price growth back toward its 2% target. More stimulus measures would indirectly weaken the euro against the dollar and its other rivals, driving up the prices of imported goods.
Core prices grew at an annualized rate of just 0.7% in February, down from 1% a month earlier, and only slightly above its level from January 2015, before the ECB announced its program of monthly asset purchases.

Goldman’s economists have called for a 10 basis-point deposit-rate cut, and for the central bank to increase its monthly asset purchases by €10 billion. But Brooks believes the ECB will go even further — possibly cutting its deposit rate by 20 basis points or more while committing hundreds of billions of additional euros to its program of monthly asset purchases.
The Goldman team has stood by its call for the euro to hit parity with the dollar even as many other strategists have backed away from that view over the past six months.
Goldman’s current forecasts put the euro at 95 cents in 12 months.
Brooks said there was “a compelling case” for shorting the euro EURUSD, -0.2906%  ahead of the ECB’s December meeting even though the shared currency had already shed 3.5% of its value against the dollar during November.
But the ECB underdelivered, sparking a massive short squeeze in the euro. Shortly after, Brooks & Co. admitted that they badly misread the meeting.
But circumstances have changed since December, Brooks said. If the central bank wants to have a shot at reviving inflation, it will need to drastically expand its stimulus efforts.

US:EURUSD

1.0251.0501.0751.1001.1251.1501.175

“There is little doubt in our minds that the ECB wants to surprise this week, not just because of the inflation picture, but also because it disappointed in December, inadvertently tightening financial conditions materially,” Brooks said.
Brooks believes the eurozone’s persistently weak price growth is linked to labor-market reforms adopted by peripheral countries like Italy and Spain, as both sought to make their industries more competitive.
Wages fell as a result of the reforms, weighing on prices.
Brooks believes the ECB’s decision to hold back in December was meant as a repudiation of ECB President Mario Draghi’s “go it alone” style. This time, Brooks expects the governing council to find a consensus more easily.
“We know that rubbed a lot of governing council members the wrong way because they felt like he was trying to push them into another course of action,” Brooks said. “This time [Draghi] has kept a low profile, that way he can build a coalition and have more consensus.”