Goldman Sachs: The Growing Case For Continued Upside

Goldman Sachs note that “the USD has a lot going for it at the moment. Domestic data have been relatively resilient and there is a strong safe haven appeal in a rocky risk environment.”

• “We encounter very little resistance in client conversations to our baseline outlook for continued Dollar strength in coming months. However, the lack of follow-through following both the employment report & CPI has raised questions whether this view is priced.”
• “We have some sympathy with these concerns - the market continues to worry about overtightening risks & foreign intervention. But we also think recent developments have also exposed a growing, under-appreciated, tail risk that Dollar strength could prove more persistent despite challenging valuation.”
• “U.S. inflation has shown little signs of slowing, and the source of strength has transitioned from temporary supply constraints to the very tight labor market. This presents the risk that the Fed will have to stay at an aggressive pace for longer.”
• “In addition, the challenging fiscal environment - exemplified by the UK - demonstrates the potential for policy missteps to add to USD upside.”
• “Finally, recent developments have prompted concerns about financial stability.”
• “Lower energy prices would help solve a lot of these problems, and that is the biggest risk. Barring that, we think investors should continue to position for a more persistent Dollar cycle.”