Goldman: A Crooked Smile

Goldman Sachs note that “pricing ~30bp for the next Fed meeting is not a stable equilibrium, but a heavy calendar over the next few weeks will be critical for determining how that settles. So far, Fed officials have seemingly not moved much from their December projections - mostly suggesting they are still moving along that path, possibly to a slightly higher resting position.”

• “Sticking to that view, without some decent moderation in the data over the next few weeks, would probably pose a downside risk to the USD.”
• “While there appears to be a high bar to go back to 50bp increments, we also see little incentive for the Fed to want to push back much on the market pricing some probability of a more aggressive approach. This comes with a non-trivial risk of a more significant, indiscriminate move higher if the data keep 50s on the table.”
• “In our view, this 2-way risk creates value in short-dated USD upside/equity downside options.”
• “Developments abroad also argue for a more tactical, staggered environment for FX. While stronger growth and relaxed risks tend to lead to a weaker USD over time, in line with our baseline forecasts, we believe the constrained operating environment means that the USD’s fall from the peak should be more moderate from here. As February’s reset demonstrates, the global search for sufficient policy restraint likely means a more “crooked smile” for the USD before a clear winner can emerge.”