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Goldman Sachs On USD

USD

USD: CPI sets the tone. The very firm CPI report for August showed that decelerating goods prices are being fully offset by strengthening services inflation. In other words, the primary driver of price pressures is transitioning from bottlenecked supply chains to the extremely tight labor market, with this week’s high profile rail union negotiations another example of this dynamic. The market rightly treated the CPI report as a hawkish policy shock—including support for our recommendation to go short NZD/CAD—which is consistent with our findings that the market reacts more to services inflation given its linkages to the labor market. This raises the bar and creates some tactical dovish risk for the Dollar amidst expectations of a hawkish FOMC next week, but ultimately we do not think they will credibly be able to signal a slowdown in the pace of tightening against this inflationary backstop. Given the difficult task ahead, we expect the CPI report to be matched with a determined message from the FOMC, which should support our view that there is still more Dollar strength ahead.

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