Gold bars to be exempt from tariffs, White House clarifies
Investing.com - Goldman Sachs believes the U.S. dollar’s recent firmness shows signs of vulnerability that may signal an eventual reversal of its tactical bounce.
The investment bank notes that renewed outperformance of U.S. assets has helped drive the dollar’s recovery, which presents the biggest risk to their longer-term bearish view on the currency. The US Dollar Index is up 1.7% in July after losing around 12% in the first six months of the year.
However, Goldman expects more balanced global returns should encourage continued diversification away from U.S. assets amid elevated policy uncertainty.
"We are less convinced that the Dollar’s reaction to tariff news has flipped again," strategists led by Kamakshya Trivedi wrote in a client note.
Trivedi points out that while there was an initial selloff following tariff announcements, more significant negative reactions came after implementation amid escalating U.S.-China trade actions, reflecting waning safe-haven demand and likely U.S. underperformance.
The bank highlights the dollar’s reaction to reports about potential Federal Reserve leadership changes as evidence that foreign investors may still find reasons to reassess U.S. allocations even if recent outperformance continues. Goldman also notes that unstable dollar-equity correlations will likely prompt more hedging flows.
Goldman interprets recent U.S. inflation data differently than markets initially did, seeing slightly firmer tariff pass-through offset by softer price pressures elsewhere, which they believe Fed officials will eventually view as consistent with cautionary rate cuts later this year.
USD/JPY outlook
Analysts believe the rally in USD/JPY has exceeded what fundamentals would suggest, aligning with more bearish Japanese yen positioning.
This creates greater potential for a quick reversal if Japan’s ruling coalition maintains a majority or experiences only a narrow loss in upcoming elections. However, a substantial loss for the coalition could drive further USD/JPY upside.
Goldman analysts caution that a resounding defeat triggering disorderly sell-offs in long-end Japanese Government Bond yields that affect global yields should push USD/JPY lower.
Due to this possibility and the vulnerability of short positioning, risks appear skewed toward renewed yen strength around the election. After the election passes, Goldman expects broader macroeconomic factors to regain dominance.
While U.S. economic data needs to soften more convincingly for Federal Reserve policy easing to occur, Goldman economists maintain their baseline view that Fed cuts will come earlier and deeper than markets expect, with the yen likely being a primary beneficiary.
EUR/GBP outlook
Goldman has maintained its negative medium-term outlook for the British pound against European currencies despite recent positive inflation and labor market data that supported sterling in the short term.
The bank points to challenging valuation metrics and expectations for a Bank of England (BoE) terminal rate lower than current market pricing as key factors weighing on the pound’s prospects.
Recent higher-than-expected UK inflation figures and slightly firmer labor market data have been positive for the currency. However, Goldman analysts believe the impact on sterling has been limited by competing forces - the typical support from widening rate differentials favoring the UK versus the currency-negative pressure from worsening fiscal conditions reflected in rising long-term Gilt yields.
The analysis suggests a rising fiscal risk premium is primarily driving the recent outperformance of EUR/GBP compared to Goldman’s model estimates, while dampening sterling’s responsiveness to front-end rate differentials.
Goldman’s base case scenario anticipates this fiscal premium will gradually decrease over the summer, supported by a quieter calendar for domestic fiscal announcements until the Autumn budget in the fourth quarter, alongside more favorable Gilt market supply dynamics.
The bank recommends waiting for the elevated fiscal premium to recede before targeting sterling downside against European currencies, while noting that expressions of downside against the U.S. dollar remain less attractive.
Goldman economists have delayed their forecast for sequential BoE rate cuts from September to November.
"We think this further pushes back the Sterling weakness we expect," Trivedi said.
AUD/USD outlook
Economists anticipate the RBA will cut rates by 25 basis points at its August meeting, with additional 25 basis point reductions expected in November and February.
While the RBA cited inflation as the primary reason for pausing rate cuts in July, it also pointed to a tight labor market as a secondary factor. The latest data suggests the labor market is no longer as "tight" as previously assessed and may not be contributing significantly to inflation pressures.
Despite the strong case for further monetary easing, the RBA’s decision-making has been notably unpredictable this year, with surprises occurring at twice the frequency compared to the past decade, Trivedi noted.
Additional rate cuts could put more downward pressure on the AUD/USD exchange rate, according to Goldman Sachs, although broader risk sentiment and U.S. dollar movements are likely to have a more significant impact on the currency pair.
With Federal Reserve rate cuts expected to begin in September, policy easing should provide some modest support for the Australian dollar over the medium term, even as near-term challenges persist.
USD/TRY outlook
Goldman Sachs has revised its outlook on the Turkish lira, noting that while the currency continues to offer steady carry trade returns, its relative attractiveness has diminished ahead of expected central bank rate cuts.
The Turkish lira has been depreciating at a 1.5-2% monthly pace in recent months, keeping monthly total returns from short USD/TRY positions close to 1%, according to Goldman Sachs. This places rolling total returns near recent lows, excluding periods of high volatility.
Goldman Sachs economists expect Turkey’s central bank to cut rates by 350 basis points next week to 43%, though market consensus points to a smaller 250 basis point reduction.
As a result, the bank has also updated its USD/TRY forecasts to 42, 44, and 48 for 3-, 6-, and 12-month horizons, respectively, compared to previous forecasts of 41, 43, and 45.
"We think declining external balance risks are a positive development for the Lira and reduce the risks of a more volatile depreciation path, but, in relative terms, this is now a less exceptional carry trade in our view," Trivedi wrote.