Where Goldman Sachs sees EUR/USD and USD/JPY heading

The latest note from FX analysts at Goldman Sachs:

1- "Since September's dovish ECB meeting, the EUR has been volatile but is largely unchanged in level terms. Expectations of ECB easing have increased, including our own - we expect that in coming months the ECB will extend its asset purchase program at the current run-rate at least to end-2016, before tapering through 2017, representing a substantial increase to the balance sheet relative to the current September 2016 baseline," Goldman Sachs projects.

2- GS strongly believe that ECB easing as per our expectations would lead to further EUR/$ downside because of the following 2 reasons:

"First, the EUR looks to be lagging moves in other Euro area assets that may be pointing towards further ECB easing, likely as a result of both the dovish Fed and negative global risk sentiment," Goldman Sachs argues.

"And second, positioning in the EUR remains light, especially when compared with the run-up to QE in January, suggesting limited appetite to trade a dovish ECB through the EUR. An instructive example for this was back in September 2014, when ECB President Draghi first hinted at a large scale ECB balance sheet expansion 'to early 2012' levels, implying around 700-1000 EUR bn expansion. From this announcement, EUR/$ fell from around 1.30 right up to and through the announcement of QE in January 2015 despite lengthy debate about the extent to which ECB easing was priced," Goldman Sachs adds.

3- Like the EUR, Goldman Sachs sees similar dynamics in JPY where positioning has fallen since the recent China devaluation.

"And like the ECB, the BoJ face a challenging inflation outlook that is only compounded by recent international developments - we expect that the BoJ will ease policy at their second meeting in October, a key reason behind our bullish $/JPY forecasts," Goldman Sachs projects.

4- "Market turmoil around China and last week's dovish Fed have lowered the market's conviction in what we believe are still strong macro trades in both EUR/$ lower and $/JPY higher," Goldman Sachs advises.

5- "In our view, these international developments only strengthen the case for further ECB and BoJ easing, and we continue to forecast EUR/$ at 0.95 and $/JPY at 130 in 12 months," Goldman Sachs projects.

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