Goldman Sachs analysts suggested that the US dollar has room to strengthen further than the market is currently predicting.
In the investor note prepared by Goldman Sachs analysts Michael Chail and Lexi Kanter, it was stated that credit conditions in the USA did not tighten as much as feared at first, while economic activity in Europe and China disappointed strong expectations.
In the investor note, “The dollar has room to strengthen further in the short-term as the market prices. We think that the depreciation of the dollar this year will be more limited than the general belief.
Stating that there are not enough factors to require the Euro to continue to strengthen and that there is no divergence between the Fed and ECB policy paths, Godman Sachs analysts kept their EURUSD forecast for the end of 2023 as 1.10.
DXY produces mixed signals
The US Dollar Index (DXY) is trying to compensate for the recent downtrend with a gradual rise. From $101 May 8 low, DXY has already risen to $103.5. In fact, looking at the daily timeframe chart, it looks like a clear parabolic recovery is taking place and the index is currently hovering around the 2-month high.
However, the probability of DXY’s uptrend being permanent is decreasing, according to some analysts. Recently, the buying momentum has intensified in the Dollar market. The rising RSI is considered as an indicator of this. Over the past year, this indicator has stepped into overbought territory six times. Each time, the Dollar Index fell right after.
But according to Goldman Sachs, macroeconomic conditions have a significant impact on forex trading. According to analysts from the investment banking company, credit conditions in the US did not tighten as initially expected:
The dollar will only slowly slow from the top, with a series of bumps along the way, as slack in the economy remains limited, so policymakers will need to keep one foot on the brakes.
Goldman Sachs Analysts
Analysts also emphasized that the depreciation of the USD is generally associated with “strong growth” in the rest of the world and “weak growth in the USA”. According to Cahill and Kanter, activity in Europe and China disappointed strong expectations from the start of the year. Analysts stressed that the euro “has not yet stepped into its expected role” and added:
DXY is up more than 1% so far in May as markets adjusted expectations about the timing of the Fed’s rate cuts and debt ceiling coldness also bolstered the currency’s safe appeal. This came after two months of depreciation of the dollar.
The euro still does not play the role of a rival to the dollar
“Dollar dollar depreciation is typically associated with strong growth in the rest of the world, not weak growth in the US. We are still waiting for a competitor and the euro is not yet stepping into that role.” statements were included.
Analysts maintained their forecast of 1.10 per dollar at the end of 2023 for the euro/dollar parity, while stating that there are not enough factors to guarantee the continued appreciation of the euro and that the policy paths of the Fed and Europe are not actually that different.
The euro fell 0.4% to 1.0774 on Tuesday after two days of gains.
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