Goldman Sachs has increased its EUR/USD forecasts, expecting the pair to reach 1.20 by the end of the year and 1.25 over the next 12 months. This change is attributed to a structural reassessment of the US dollar rather than optimism about the euro.

In 2017, the euro’s strength was driven by global growth optimism and capital inflows into the Eurozone. However, the current strength stems from dollar weakness, with emerging data suggesting shifts away from USD assets.

Euro Valuation and Dollar Reassessment

In 2017, the euro was undervalued, whereas today it is broadly overvalued. This reduces the potential for significant upward momentum, with the current situation focusing more on dollar repricing than euro revaluation.

The current structural shift in the USD supports some EUR/USD upside but lacks the valuation tailwind of previous long-cycle rallies. This is expected to result in a more contained rally compared to past long-term dollar depreciation episodes.

Goldman Sachs anticipates further EUR/USD increases, primarily due to USD weakness and changing global capital flows. The anticipated rally will be more stable and limited, with the potential to reach 1.25, contrasting earlier rapid appreciation cycles.

What the original content lays out is fairly clear: the projected movement in the EUR/USD pair is not a story of growth in the eurozone or some swell of European economic optimism like we saw in earlier years. Instead, it’s more a story of loss—or perhaps better said, lowered expectations—on the dollar side. Back then, in 2017, what pushed the euro upward was a broader sense that global markets were on an upswing. Investors were moving money into the eurozone due to growth expectations. That mood was buoyant. Now, the euro itself is less attractive in valuation terms than it once was, which makes upside more difficult to come by.

Today’s push higher is being driven by a softer dollar. The reasoning is largely structural, not cyclical. That is, it’s about a longer-term reassessment of US financial assets rather than short-term changes in interest rates or economic data. This is backed by evidence of global diversification—more institutions are starting to move away from holding dollar-heavy positions. Zhang’s team’s thesis concentrates on the fact that the dollar’s role, while still foundational, is facing fresh scrutiny.

Implications for Strategy and Positioning

So what does that mean for us, particularly anyone assessing future rate differentials or positioning in the near term? Well, this isn’t the type of environment to expect explosive directional swings driven by euro strength itself. That’s the key takeaway. Without the boost of an undervalued euro, any gains will feel like a steady shuffle instead of a sudden climb. And because the euro is largely seen as modestly overvalued already, directional conviction centred solely on a stronger euro would be difficult to build and maintain.

The idea, then, is that we should be pricing scenarios around persistent but moderate dollar headwinds. Any trade aimed at capitalising on EUR/USD upside needs to be constructed with that in mind—not riding a potential breakout, but steadying for controlled elevation. It isn’t about piling into risk, but leaning with the pressure on the upside when dollar rebalancing gives a window of opportunity.

The 1.25 level, which the bank predicts, doesn’t imply urgency or abrupt demand for euros. Thomas’ analysis argues for a weaker dollar, which plays out slowly over the coming year—not in one dramatic wave. Any position-taking should be timed accordingly. That means watching closely for when the market lets go of dollar-long exposure on macro sensitivity—whether triggered by data or subtle shifts in global allocation preferences.

For us, the price action will need monitoring across option markets too. Realised volatility hasn’t picked up much, but even modest upward drift in spot rates should see implieds tracking slightly higher. Hence, there’s still room for moderately directional expressions. However, higher strike calls should be selected thoughtfully, with expiries allowing time for the weakening dollar narrative to materialise without relying on aggressive near-term movement.

The key is to avoid loading too heavily onto short-dated upside unless tactically hedging. Longer time horizon EUR/USD upside positioning appears more grounded, given the support from broader macro shifts. We should be structured towards asymmetry where it makes sense (longer-dated risk reversals are one such option), anchoring strategies to a slower unfolding depreciation story in the dollar, rather than euro-centric catalysts.

In short, calm hands will benefit: not from betting on the euro taking charge, but from positioning appropriately around a dollar gently losing its grip.

Create your live VT Markets account and start trading now.