Goldman Sachs is out with its near-term forex outlook

Goldman Sachs maintains a long-term bearish view on the U.S. dollar, anticipating earlier and deeper Fed rate cuts than market consensus, which they believe will benefit the yen, especially post-Japanese election. The bank also holds a negative medium-term outlook for the British pound against European currencies, citing valuation challenges and a rising fiscal risk premium, recommending patience before targeting downside. Concurrently, Goldman expects significant RBA rate cuts to pressure AUD/USD near-term, while revising USD/TRY forecasts higher as the lira's carry appeal wanes ahead of aggressive Turkish central bank easing.

Analysis

Goldman Sachs presents a long-term bearish outlook on the U.S. dollar, viewing its recent 1.7% gain in July as a vulnerable tactical bounce that runs counter to their core thesis. The bank anticipates that continued diversification from U.S. assets, driven by policy uncertainty and expectations for earlier and deeper Federal Reserve rate cuts than the market consensus, will ultimately weigh on the currency. Specifically for USD/JPY, Goldman believes the pair has rallied beyond fundamentals and is susceptible to a sharp reversal, particularly around the upcoming Japanese election, due to crowded bearish yen positioning. For the British pound, a negative medium-term outlook against European currencies is maintained, as challenging valuations and a rising fiscal risk premium in Gilt yields are expected to overshadow support from recent positive inflation and labor data; the bank advises waiting for this premium to recede before targeting sterling downside. In Australia, anticipated RBA rate cuts of 25 basis points each in August, November, and February are expected to pressure the AUD/USD, though the pair's direction will be more significantly influenced by broader risk sentiment and the U.S. dollar's trajectory. Lastly, the Turkish lira's appeal as a carry trade is seen as diminishing, with Goldman forecasting an aggressive 350 basis point rate cut and revising its USD/TRY targets higher to 42, 44, and 48 for 3-, 6-, and 12-month horizons, reflecting a weaker lira outlook.

Key Decisions for Investors

• Consider positioning for a longer-term depreciation of the U.S. dollar, as Goldman Sachs views the recent strength as a temporary bounce vulnerable to a reversal driven by eventual Fed easing.
• Monitor the Japanese election outcome closely, as a favorable result for the ruling coalition could trigger a rapid strengthening of the yen (lower USD/JPY) due to overstretched short positioning.
• It may be prudent to delay initiating new short positions in the British pound against the euro until the elevated fiscal risk premium reflected in Gilt yields subsides, as this is currently a primary headwind.
• Re-evaluate the risk-reward of long Turkish lira carry trades, given Goldman's expectation of aggressive central bank rate cuts and upwardly revised forecasts for USD/TRY.
• Anticipate near-term downside pressure on the Australian dollar from expected RBA rate cuts, but remain aware that Fed policy easing from September could provide modest medium-term support.