(Bloomberg) — The Federal Reserve’s hawkish turn prompted both Goldman Sachs Group Inc. and Deutsche Bank AG to abandon their calls that the euro will rally against the U.S. dollar.
The euro dropped as much as 1.1% to 1.1994 per dollar on Wednesday — the biggest tumble since April 2020 — after policy makers signaled the Fed would boost interest rates twice by the end of 2023, which surprised markets. Some even forecast a move next year. The currency breached 1.20, which suggests to some traders that more losses are coming.
While many dollar bears cut back short bets this week amid speculation the Fed could surprise with a hawkish view, others believed that the central bank’s longstanding view that inflation is transitory meant it would maintain a dovish tone. With policy makers upgrading estimates for inflation, and Chairman Jerome Powell suggesting Wednesday that officials would begin a discussion about scaling back bond purchases, U.S. Treasury yields surged along with the greenback, forcing traders to cover shorts.
“We continue to forecast broad U.S. dollar weakness, driven by the currency’s high valuation and a broadening global economic recovery,” but “more hawkish Fed expectations and the ongoing tapering debate look likely to be a headwind to dollar shorts over the near term,” Zach Pandl, Goldman’s co-head of global foreign-exchange and emerging-market strategy, said in a report.
Pandl said the team initiated the recommendation on April 16 at 1.20, similar to current spot levels.
In closing out its recommendation, Deutsche Bank’s George Saravelos said there’s now “greater scope for a front-end real rate repricing in the U.S. yield curve” and also “room for higher volatility.”
Both factors are bullish for the dollar, he said, adding that “the support the Fed was providing for EUR/USD upside is no longer there.”
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