Goldman Sachs Bears USD Post-Fed Cut; GBP, EUR, JPY, CNY Rates Rise

Last week, the Federal Reserve initiated this round of easing cycle by significantly cutting interest rates by 50 basis points, leading Goldman Sachs to bearish on the US dollar.

In their recent report, Goldman Sachs downgraded the forecast for the US dollar against a range of currencies and upgraded expectations for several other major currencies, including the euro, pound, and yen.

The aforementioned report by Goldman Sachs strategists, including Kamakshya Trivedi, believes that the decision to cut interest rates significantly last week reflects the Federal Reserve's willingness to tackle the economic downturn in a more aggressive manner than other central banks.

It is anticipated that as yields lose their appeal, the US dollar will gradually weaken.

The report states: "Over time, this balance should lead to a weakening of the US dollar, but we still expect this to be a gradual and uneven process.

We also continue to believe that the high valuation of the US dollar will not be eroded quickly or easily, but the threshold has been lowered somewhat."

Based on the latest forecast for the US dollar, Goldman Sachs, which has been bullish on the pound since the beginning of the year, is now even more bullish, expecting the pound to rise to 1.40 against the US dollar within 12 months, an increase of nearly 6.1% from the previous expectation of 1.32.

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If the forecast is correct, the pound will reach 1.40 for the first time since 2021, which is also the highest expectation for the pound among Wall Street institutions.

Goldman Sachs strategists say that the pound is supported both by its risk beta coefficient and by strong growth momentum and a patient Bank of England.

The market has already digested the risks of a US economic recession, and risk assets and cyclical currencies like the pound have benefited from this.

For the euro, Goldman Sachs has raised its 12-month forecast for the euro against the US dollar to 1.15, up from a previous depreciation to 1.08, an increase of nearly 6.5%.

Goldman Sachs has also raised its expectation for the yen against the US dollar to 140 within the same period, up from a previous forecast of 150, an increase of nearly 6.7%.

Goldman Sachs has also upgraded its expectations for the Chinese yuan against the US dollar, expecting the yuan to rise to 7.25 against the US dollar within the next 12 months, up from 7.40, an increase of about 2%.

The aforementioned bearish view on the US dollar by Goldman Sachs contrasts with the recent views of Deutsche Bank strategists.

Deutsche Bank believes that the Federal Reserve's initiation of interest rate cuts will have little impact on shaking the high-yield status of the US dollar.

Forex strategists at Deutsche Bank, including George Saravelos, wrote in a report that they believe the market's pricing of the Federal Reserve is too dovish, and the market underestimates the positive risks to the US dollar from a Trump victory, hence Deutsche Bank favors buying the US dollar.

Prior to the Federal Reserve's interest rate cut last week, Goldman Sachs analysis showed that the seven interest rate cut cycles from 1995 to 2020 can be divided into "coordinated" and "uncoordinated" categories, that is, if at least four other G10 central banks start cutting interest rates within six months of the Federal Reserve, the cycle is considered coordinated.

Otherwise, it is considered uncoordinated.

Goldman Sachs found that coordinated interest rate cut cycles are generally more favorable to the US dollar, while uncoordinated cycles are unfavorable.

Over the past three months, several G10 central banks have already begun to ease monetary policy.

Goldman Sachs believes that this could form a relatively coordinated global interest rate cut cycle, which would help to alleviate the downward pressure on the US dollar from the Federal Reserve's interest rate cuts.

However, Goldman Sachs points out that the US dollar has a safe-haven status, and its performance in the face of slowing US economic growth depends on the condition of other global economies.

For example, from late 2007 to early 2008, as the US economy slowed down, the US dollar weakened.

This was because at that time, economic growth in other parts of the world was relatively strong, and the market believed that the US economic problems were mainly domestic issues that did not spread to other regions.