Goldman: A Little Bit Broader Now

Goldman Sachs note that “the USD’s momentum is gathering steam. Up to now, we have argued that USD strength should be more concentrated against the G10, since better growth news should offer protection for high beta EM crosses, which is why USD swings tend to be more limited when growth expectations are driving markets”

• “However, with the market and policymakers starting to reassess how much tightening might ultimately be required, we see some risk that the next leg higher in the USD, if it extends, could be more indiscriminate.”
• “That would be a return to the policy-driven market that dominated FX moves in 2022, which could unlock a broader USD move. In particular, popular FX carry positions could be vulnerable if policymakers start to more openly discuss a more aggressive tightening strategy. Given the relatively light data calendar, we think it will be difficult for the market to find much comfort ahead of Fed Chair Powell’s testimony in a couple weeks. However, if data show some mean reversion and the policy path becomes more tethered, then we think we are likely approaching the limits of the U.S.-side of this market correction.”
• “To capture our 3-month EUR/USD target of $1.02 will likely require some reassessment on the other side of the cross as well.”