Goldman: USD Holding Firm Into Year-End On Covid Risks & Hawkish Fed

Goldman Sachs note that “the substantial rally in the broad USD, ongoing since mid-June, will most likely continue into year-end. Fed officials have made a significant hawkish pivot: the FOMC accelerated the pace of QE tapering and removed language about overshooting the inflation target from its statement, and the median participant now expects three rate increases in ‘22. The Fed’s shift has been partly priced in, but we think markets may still underappreciate the timing and pace of funds rate hikes (our economists now expect a first rate increase in March). Although omicron outbreaks should weigh on U.S. growth to a degree, analysis by our global economics team finds that the U.S. on average introduces fewer lockdowns for any given amount of covid fatalities. This suggests U.S. activity may hold up relatively well through any wobbles in growth expectations in the coming weeks. Lastly, mutual fund flows have turned strongly USD-positive, and we see little reason for that trend to pause. Our forecasts still envision that the USD will be flat-to-down over the course of ‘22 due to healthy global growth and rate hikes by other central banks (e.g. the Bank of Canada) that keep pace with the Fed. But over the near-term we would expect USD strength to continue, and favour relative value expressions instead of USD crosses, including AUD/CAD shorts (we stopped out last week but still like the thesis) and EUR/SEK lower & EUR/USD lower dual digitals.”