Goldman Sachs on EUR/USD
Yesterday was the return of European sovereign risk — not the slow, benign spread widening we've grown used to, but a violent, two-sided one: Italy and France both sold off, the Bund caught a safe-haven bid, equities wobbled and EUR/USD got hit hard. The tell was the front end 2y BTP-Bund spreads blew out, which smells like genuine stress spilling over from France, not just a long-end credit drift. You can call it a carry unwind — steepeners and sovereign longs getting deleveraged in a hawkish, energy-shocked, higher-vol regime and maybe it is. But don't reach for the 2011 playbook: back then the ECB had low inflation and room to be generous. Today it doesn’t. Remember SVB — markets priced dovishness, then learned the economy was still hot and got run over by a duration sell-off. For EUR/USD the mechanism is clean: if the ECB trades tighter sovereign conditions for more hikes, or goes dovish and supportive on the balance sheet, euro goes lower. The only bullish path is spread control via the balance sheet — moderating full-pace QT, reinvestments, a BoE-2022-style backstop — while still hiking.”
Yesterday was the return of European sovereign risk — not the slow, benign spread widening we've grown used to, but a violent, two-sided one: Italy and France both sold off, the Bund caught a safe-haven bid, equities wobbled and EUR/USD got hit hard. The tell was the front end 2y BTP-Bund spreads blew out, which smells like genuine stress spilling over from France, not just a long-end credit drift. You can call it a carry unwind — steepeners and sovereign longs getting deleveraged in a hawkish, energy-shocked, higher-vol regime and maybe it is. But don't reach for the 2011 playbook: back then the ECB had low inflation and room to be generous.
Today it doesn’t. Remember SVB — markets priced dovishness, then learned the economy was still hot and got run over by a duration sell-off. For EUR/USD the mechanism is clean: if the ECB trades tighter sovereign conditions for more hikes, or goes dovish and supportive on the balance sheet, euro goes lower. ”