USD price action: A deja vu – Goldman Sachs

The dovish FOMC surprise this March is casting a shadow over the Dollar, similar to a year ago. The last time the FOMC damaged conviction, when a “hawkish” dot plot in March 2014 was followed by “dovish” minutes in April. At the time, the Dollar fully unwound what were the makings of a rally and remained in the doldrums until mid-2014.”

“In the aftermath of a dovish Fed surprise, are we cruising for a repeat? We think not. After all, the unemployment rate is a lot lower now and there is a reasonable chance it could approach the Fed’s NAIRU estimate (5.1%) at some point over the summer. Friday’s payrolls report is especially interesting in that regard, because our expectation for solid jobs growth (230k) could come with sizeable back-revisions: on average since 2010, the average 2-month revision in April is 74K, with the smallest being 36K.”

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Risk-Reward Into NFP:

With lift-off approaching and market pricing at the dovish end of the spectrum, we think this is a good time tactically to re-establish Dollar longs. Ahead of Friday, our favorite expression of Dollar strength is versus the Euro and then the Yen.

EUR/USD, USD/JPY Forecasts:

We continue to have high conviction in EUR/USD downside (our 12-month forecast remains 0.95) and USD/JPY upside (a 12-month forecast of 130).

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