Synopsis:

Goldman Sachs presents three reasons to temper bearish views on the USD despite the upcoming FOMC rate cuts. They argue that the current dollar weakness is well-anticipated, and that future dynamics might favor a stronger USD.

Key Points:

1. Market Reflection:
   • Limited Decline: The broad Dollar has fallen only about 1% since the summer peak, while the DXY is down around 5% and flat for the year. The current level of USD weakness largely reflects existing cuts and recession risks.
2. Potential for Rebound:
   • Undershot Growth Expectations: Market pricing for growth has been overly pessimistic compared to Goldman Sachs' more positive outlook. If the Fed underdelivers on rate cuts and the US economy performs better than expected, the USD could recover some losses against major currencies.
3. Historical Context:
   • Cutting Cycles and USD Strength: Historical analysis shows that rate-cutting cycles are not consistent indicators of USD weakness. In fact, the USD has historically strengthened after the first cut in coordinated easing cycles.

Conclusion:

Goldman Sachs advises against being excessively bearish on the USD in light of the anticipated FOMC easing. The current USD weakness is seen as already factored into the market, and potential scenarios suggest the dollar could strengthen if the Fed's actions fall short of expectations or if the US economy outperforms. Historically, USD strength has often followed initial rate cuts in easing cycles.