In its latest research report, Goldman Sachs expects US dollar stability while citing the market’s response to Fed Chair Jerome Powell’s tapering hints and their signal of monetary policy adjustments, marked in June.
Key quotes
Following Fed Chair Powell's Jackson Hole speech, the July FOMC meeting minutes, and a variety of public comments from other officials, we now have a clearer sense of the Fed's QE tapering plans (our economists expect a November announcement, December start, and September 2022 conclusion to the process).
Shifting Fed expectations have supported the dollar over the last two months. But with tapering now largely priced in, and the currency stronger as a result, following through with the process should not drive the Dollar higher from this point forward.
We therefore expect the greenback to stabilize over the coming weeks, and possibly depreciate against certain crosses with attractive domestic fundamentals.
That being said, several factors could prevent more sustained Dollar weakness, including surprising strength in this week's nonfarm payroll report, stubbornly high US inflation, and/or the September FOMC meeting ‘dot plot’, which could show as many as four additional rate hikes in 2024.
We forecast broad Dollar depreciation over time on our expectation that the global economic recovery will continue and that slowing domestic growth and lower inflation will allow the Fed to remain on hold until Q3 2023.
But for that trend to take hold, markets may require clearer signs that delta variant outbreaks are behind us and that US inflation pressures have come down.
Following the June FOMC meeting we argued that the broad USD could appreciate an additional 1.5-3.0% over the near-term should markets continue to price Fed expectations in a hawkish direction.
The USD gained roughly 1.5-2.0% (depending on the measure) from that point to its mid-August highs, and has since retraced about 1%.
