So short US dollars into the FOMC then?
The Fed Cometh In this past weekend’s newsletter, I reviewed the current fundamental, economic and technical backdrop of the market following the March rebound from the recent lows, which was front running the ECB’s monetary policy decision.
“The question, of course, is whether the ECB’s interventions will be able to change the longer-term dynamics in the Eurozone by creating inflationary pressures and sparking economic growth? That answer is likely “no” as it has failed to do so in the past, not only in the Eurozone but also in Japan and the U.S.In order for the market to change the current negative dynamics, which in turn would warrant a significant increase in long-term equity exposure, it will require a uniform improvement in the technical underpinnings and likely a breakout to all-time highs.“
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Goldman Sachs says to go long US dollar into Fed meeting
With the US economy continuing to grow above trend, printing very robust employment gains month after month, and with unemployment at 4.9% and a sharper-than-expected acceleration in core inflation, rates hikes will be on the agenda for this FOMC meeting.
Goldman Sachs economists expect the next 25bp hike in June but also think that a hike in April is not inconceivable. The Fed is close to meeting its dual mandate and, if it were to wait too long to continue the hiking cycle, it could run the risk of letting the economy over-heat, only to then hike rates much faster and potentially to a higher level. We consider that in the March and subsequent FOMC meetings, the Fed's leadership, most of whom are primarily academic economists, should give more weight to such considerations and to the positive economic backdrop than to temporary moves in asset prices, particularly if the evidence shows that such volatility does not impact the real economy.
We discuss (i) why we expect the FOMC to turn progressively more hawkish, tactically supporting our long USD view, and the risks around this outcome; (ii) by how much we expect the USD to appreciate if our view on the Fed will prove right; and (iii) which G-10 currency offers, in the near term, the best risk-reward for tactically playing our view on the Fed, where last week's shift by the ECB into credit easing may make meaningful EUR/$ downside more difficult in the near term.
Long USD into the FOMC meeting: If we are right and the Fed again uses this meeting to lead the market toward the next rate hike, this should be dollar positive.
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