Europe's Energy Evolution
Lead — Europe's energy transition toward renewables is gaining momentum, as outlined by Goldman Sachs' Alberto Gandolfi, who notes that renewables are becoming significantly cheaper than conventional power generation. This shift is expected to drive further displacements in energy sourcing over the next decade, indicating potential impacts on economic stability and currency movements in the eurozone. Per the full note , this transition aligns with broader trends in inflation and fiscal policy, which may influence forex markets, particularly the euro's performance against the dollar as these changes unfold.
What the desk is arguing
The desk posits that Europe's pivot to clean energy will have profound macroeconomic implications, particularly for the euro. As Goldman Sachs highlights, the cost of renewable energy has plummeted significantly, suggesting a long-term decline in reliance on fossil fuels and a shift towards sustainable energy sources across the continent.
Gandolfi emphasizes that in various European regions, the cost of renewable energy technologies has undercut conventional generation, marking a critical inflection point in the energy landscape. With renewables anticipated to dominate the energy mix within the next decade, investors should brace for potential volatility in traditional energy markets and possible appreciation of the euro against currencies tied to fossil fuel economies.
Where it sits in our coverage
Our internal consensus currently points to a target of 1.075 for the EUR/USD pair, with the range spanning from 1.04 to 1.12. Notably, jpmorgan forecasts a closer target of 1.10, while bofa takes a more conservative stance at 1.04.
This view reflects a consensus that acknowledges the momentum of renewable energy but also weighs the short-term volatility tied to geopolitical factors and shifts in energy pricing. The desk's position aligns closely with jpmorgan, suggesting the euro's potential to appreciate if these clean energy developments strengthen the European economy over the medium term.
How other firms see it
Several firms, including jpmorgan, are aligned on the necessity of transitioning to sustainable energy sources and the resultant economic implications, while others like bofa express caution regarding immediate impacts on currency stability.
Apart from the energy sector, the EUR/USD trajectory reflects broader economic signals, particularly along the lines of ECB monetary policy adjustments as influenced by inflation data and EU recovery fund disbursements. Keeping an eye on shifts in energy policy may offer insights into euro fluctuations against the backdrop of relative dollar strength.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Renewable energy costs significantly lower than conventional sources.
- 02Europe expected to transition to renewables over the next decade.
- 03Implications for euro strength against USD as the energy landscape shifts.
- 04Energy policy changes likely to influence broader economic conditions.
Market implications
Traders should monitor for potential euro appreciation as clean energy strategies gain traction, particularly if inflation data supports a robust economic environment in Europe. Breakout levels to watch are near 1.075.
Risks to this view
A reversal could occur if there is renewed volatility in energy prices, related to geopolitical tensions or supply chain disruptions, which could undermine the anticipated benefits of the energy transition.
Europe's energy sector is undergoing a transformation toward sustainable energy sources, says Goldman Sachs Research's Alberto Gandolfi. In this episode, Gandolfi discusses why clean energy has started to undercut the cost of conventional generation. "In several regions of Europe right now, renewables are way, way cheaper than any other technology. So we think they're going to displace conventional generation over the next decade," Gandolfi says.
This podcast was recorded on August 2, 2018. All price references and market forecasts correspond to the date of this recording. This podcast should not be copied, distributed, published or reproduced, in whole or in part.
The information contained in this podcast does not constitute research or a recommendation from any Goldman Sachs entity to the listener. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty, as to the accuracy or completeness of the statements or any information contained in this podcast and any liability therefor (including in respect of direct, indirect or consequential loss or damage) is expressly disclaimed. The views expressed in this podcast are not necessarily those of Goldman Sachs, and Goldman Sachs is not providing any financial, economic, legal, accounting or tax advice or recommendations in this podcast.
In addition, the receipt of this podcast by any listener is not to be taken as constituting the giving of investment advice by Goldman Sachs to that listener, nor to constitute such person a client of any Goldman Sachs entity. Copyright 2018 Goldman Sachs & Co. LLC.
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