Goldman: Forecast Tweaks Post-FOMC; Maintaining Conviction In Bearish Trend

Goldman Sachs note that "the signal from the last FOMC meeting arguably truncated the risk of a sharp USD depreciation driven by high inflation and very low real rates, and should result in a clearer positive correlation between higher domestic inflation news and USD appreciation. As a result, we revised several of our USD cross forecasts to show reduced USD downside, in part to take on board our slightly revised Fed call. In a scenario in which U.S. data surprises substantially to the upside and Fed officials build additional fiscal support into their forecasts, further upward revisions to the "dots" are possible, and participants may show a relatively steep rate hike path in their 2024 projections, first published in September. As a rule-of-thumb, adding one additional Fed rate hike to end-2023 (around the 2y1y point of the rates curve) would raise the expected path of USD vs G10 crosses by 1.50-1.75% on our models. While there may be upside risks to the USD over the short-term, we continue to expect significant USD depreciation over the medium-term. The USD is overvalued and arguably over-owned after a long stretch of U.S. asset market outperformance during the last business cycle. But from this point forward, other regions may offer increasingly competitive returns, due to relatively low nominal and real yields in the U.S., as well as a likely increase in corporate tax rates, and strong growth (and increasingly rate hikes) overseas. In addition, our own funds rate forecasts are well below market pricing, and it's important to recognize that U.S. growth and inflation should peak relatively soon (on a quarterly basis, core PCE inflation peaks in Q2 and real GDP peaks in Q3 on our forecasts). We would caution against extrapolating the hawkish Fed signal too far, ahead of the substantial deceleration we expect into 2022. For now, we stay on the sidelines in G10 vs USD, and keep open our recommendation to go short USD vs BRL and RUB in EM."