Goldman's On The USD Outlook

Payrolls keep the pressure on. Earlier this week, markets tried (yet again) to trade a “peak hawkishness” theme. The narrative was that the UK inadvertently revealed some market tensions, and the pain that could come from further aggressive rate rises. A large drop in reported job openings added to this market theme, as presumably positive progress in cooling the labor market would make the prospect of more disruptive rate hikes less appealing. It is also possible that quarter-end dynamics played an important role. However, subsequent comments from Fed officials and Friday’s payrolls release confirms that so far this attempted market pivot is not supported by the fundamentals; the labor market remains very tight, and that is pushing up cyclical inflation (and next week’s CPI release will be the next barometer for this). In our view, this keeps us in the “FCI loop” where US policymakers are unlikely to change course before we see clear and compelling evidence that the underlying drivers of above-target inflation are on a more sustainable trend. That should support some further broad Dollar strength ahead. As we are beginning to see even more clearly now, the case for further tightening is stronger in the US than most of its peers, and the Fed faces fewer domestic constraints on tightening than others as well. That continues to make the Dollar a hard bar to beat as we move through Q4.