Goldman: Focus On The Fed’s Criteria For Slowing Down

Goldman Sachs note that “the USD rally has broadened in recent weeks, driven in large part by a combination of escalating Fed expectations and (partially relatedly) rising recession risks. A convincing turn in the USD will likely require more calming inflation news and more balanced Fed policy. While some of the very recent news on inflation has been encouraging, we think a tactical USD selloff will require some acknowledgement of this by Fed officials this week. While markets will again focus on the hiking increment at this meeting and guidance for September, the lesson from the June meeting is that it will be more important to focus on the Fed’s criteria for adjusting its approach. Back in June, the criteria the FOMC established of “clear and convincing evidence” that inflation was slowing was almost certain to not be met by July (and probably not September either), and too narrow to quell recession fears. At the meeting this week, we will primarily be focused on whether officials broaden that criteria to put more focus on slowing activity data. Until that shift is clearer, it will be difficult for the market to price a more accommodative Fed and a weaker USD.”