Goldman Sachs believes the main FX theme has returned to carry and shocks from energy terms of trade

Overview

This is a Goldman Sachs global FX strategy report focused on USD, EUR, GBP, ZAR, JPY, HUF, AUD/NZD, and IDR. The report argues that although realized volatility in major exchange rates has recently been limited, the underlying drivers of the FX market remain clear: carry divergence between high-yield and low-yield currencies, the impact of energy prices on terms of trade, central bank policy paths, fiscal risks, and potential risk events. The overall conclusion is not a one-way bullish or bearish call on the dollar, but rather an emphasis that the USD and other major currencies will show more differentiated performance over the coming months.

Core views

On the USD, Goldman Sachs believes elevated energy prices can provide some support, but if the Fed remains on hold through year-end, that would create a mild and manageable headwind for the dollar relative to G10. On the euro, the report argues that EUR/USD will remain under pressure because the euro is hurt both by deteriorating energy terms of trade and by the disadvantage of being a low-yield currency. On sterling, Goldman Sachs maintains a tactical short GBP/USD view, believing uncertainty around UK fiscal spending and financing, energy prices, and softer risk appetite may continue to weigh on the pound. On the yen, near-term pressure remains negative, and USD/JPY may continue to rise, but crowded positioning, intervention, and repatriation policies could alter the longer-term path. In emerging markets, ZAR is pressured by energy prices and the SARB staying on hold; HUF is driven more by global factors in the short term; and although IDR has stabilized recently, Goldman Sachs still expects it to underperform other NJA currencies.

Analysis framework

The report uses a top-down macro FX framework, breaking exchange-rate performance into factors such as rate differentials and carry, changes in terms of trade caused by energy prices, central bank policy expectations, fiscal risk, risk appetite, crowded positioning, and valuation dislocations. The assessment of different currencies is not based solely on local data, but on a comparison that incorporates global energy shocks, G10 and emerging-market rate expectations, the broad direction of the USD, and the historical sensitivities of currency pairs.

Methodology notes

• FX macro strategyCarry and yield divergence framework

  Return differentials of high-yield currencies relative to low-yield currencies

  The report repeatedly emphasizes that divergence between high-yield and low-yield currencies remains the core driver of recent FX returns. Low-yield currencies such as the euro and yen are at a relative disadvantage, while the performance of some high-carry currencies depends on energy prices and local policy.

• Global macroEnergy terms-of-trade shock

  The impact of energy price changes on the currencies of importers and exporters

  The report argues that rising energy prices have once again made terms of trade a key variable in the FX market. Energy-sensitive currencies such as the euro, sterling, and the South African rand are under pressure, while the Australian dollar receives some relative support versus the New Zealand dollar.

• Valuation and return forecastingGSDEER/GSFEER valuation deviation

  Bilateral and trade-weighted deviations based on Goldman Sachs equilibrium exchange-rate models

  The report appendix provides 12-month return forecasts, carry, total return, and valuation references such as GSDEER, GSFEER, and PPP for multiple currencies, used to measure exchange-rate deviations from relative equilibrium levels.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• USD

  Core macro benchmark currency

  Strengths

  Elevated energy prices, a stronger starting point, and carry/relative return factors can provide support.

  Weaknesses

  If the FOMC stays on hold through year-end, the dollar will face a mild headwind relative to G10.

  Comparison

  The report does not advocate a one-way dollar trade, but expects the dollar to perform differently against different currencies.

  Risks

  Renewed escalation of conflict, debate over AI capex, and fiscal expansion in the UK and Japan could trigger sharper FX volatility.

• EUR

  Inverse USD trade and funding currency

  Strengths

  The ECB policy path is relatively clear, and German fiscal progress is still underway.

  Weaknesses

  Affected by the energy terms-of-trade shock and the disadvantage of being a low-yield currency, EUR/USD remains under pressure.

  Comparison

  The euro has the tightest correlation with the broad dollar among G10 USD pairs and lacks local idiosyncratic volatility.

  Risks

  If energy prices or ECB pricing change materially, euro performance could change.

• GBP

  Currency sensitive to fiscal risk and energy prices

  Strengths

  Higher carry and Goldman Sachs' base case of a pro-cyclical global backdrop over the coming year may provide partial support for sterling.

  Weaknesses

  Structural overvaluation, the risk of a return in the UK fiscal premium, and lower BoE hiking pricing may weigh on sterling.

  Comparison

  Goldman Sachs maintains a tactical short GBP/USD view and believes the recent theme may continue.

  Risks

  Fiscal discussions around the autumn budget could bring episodic negative shocks to sterling.

• JPY

  Low-yield funding currency and crowded short trade

  Strengths

  If intervention, repatriation policy, or a weaker US growth outlook emerges, the yen's severe undervaluation could be corrected.

  Weaknesses

  The short-term macro environment remains unfavorable, while constructive risk sentiment and domestic fiscal risk in Japan continue to weigh on JPY.

  Comparison

  Current yen short positioning is close to the stressed levels seen before the 2024 intervention, but the macro backdrop is less supportive of a sudden sharp yen rebound than it was then.

  Risks

  Disorderly depreciation could raise intervention risk; if AI valuations are questioned and drive both yields and equities lower, the yen could significantly outperform.

• ZAR

  Currency sensitive to energy prices and emerging-market risk appetite

  Strengths

  If oil prices fall and conflict eases, South Africa's fiscal fundamentals and current levels may provide a medium-term entry opportunity.

  Weaknesses

  Rising energy prices worsen terms of trade, and the SARB staying on hold weakens support for the currency.

  Comparison

  Compared with EGP or INR, ZAR's carry is not high enough compensation for energy import pressure.

  Risks

  Oil prices staying elevated, uncertainty in energy supply, and deteriorating EM risk appetite.

• AUD/NZD

  Energy terms-of-trade and Australia-New Zealand policy divergence trade

  Strengths

  Rising energy prices support AUD/NZD in the short term, and Australian employment data has also been slightly stronger than expected.

  Weaknesses

  Rising New Zealand inflation has strengthened expectations for additional RBNZ hikes, supporting Goldman Sachs' view that AUD/NZD has room for a medium-term downward correction.

  Comparison

  Goldman Sachs prefers expressing its medium-term downside view through longer-dated AUD/NZD put options to manage short-term catalyst volatility.

  Risks

  If the energy shock persists, it could rebuild upside pressure on AUD/NZD and offset local fundamentals.

• IDR

  Asian emerging-market currency

  Strengths

  The rupiah has stabilized over the past month, and BI has kept rates unchanged while increasing incentives to attract foreign capital inflows.

  Weaknesses

  In the medium term it still faces concerns over an expanded central bank mandate, resource export regulation, the fiscal deficit ceiling, and subsidy spending.

  Comparison

  Goldman Sachs expects IDR to underperform other NJA currencies.

  Risks

  If Fed hikes bring depreciation pressure back, BI may need to preserve room for further rate hikes.

Key data

• EUR/USD forecastCurrent 1.14; 3-month forecast 1.14; 6-month forecast 1.12; 12-month forecast 1.12The global FX forecast table shows medium-term pressure on the euro against the dollar.
• USD/JPY forecastCurrent about 164; 3-month forecast 162; 6-month forecast 163; 12-month forecast 165The report says USD/JPY has risen close to a 40-year high, with short-term pressure still tilted toward yen weakness.
• AUD/USD forecastCurrent 0.70; 3-month forecast 0.72; 6-month forecast 0.73; 12-month forecast 0.74The table shows AUD/USD forecasts gradually moving higher, but the main text emphasizes that energy prices are a key risk to the AUD/NZD view.
• USD/ZAR viewIf oil prices decline in the medium term, the current USD/ZAR level could serve as an entry point to position for easing conflict and still-strong South African domestic fundamentalsThe main text does not provide a single target price, but emphasizes that energy prices and fiscal data are key variables.
• USD/IDR forecastCurrent 17915; 3-month forecast 17000; 6-month forecast 17100; 12-month forecast 17200Although the rupiah has stabilized recently, the report remains cautious on IDR and expects it to underperform other NJA currencies.

Impact & implications

The investment implication is that a low-volatility environment does not mean FX risk has diminished; instead, it may increase the value of FX as a hedging tool. At the portfolio level, attention should focus on the nonlinear impact of persistently elevated energy prices, renewed fiscal expansion, AI valuation pullbacks, renewed geopolitical conflict, and central bank policy repricing on exchange rates. Strategically, the report favors divergence trades rather than a single USD direction: euro-funded carry, tactical shorts in GBP/USD, caution toward crowded yen shorts, and differentiation among some emerging-market currencies based on energy sensitivity and central bank response.

Risks

• Energy prices remain elevated or move further higher, re-amplifying the terms-of-trade shock.
• Renewed geopolitical conflict leads to linked changes in safe-haven demand, oil prices, and risk appetite.
• Policy paths for the FOMC, ECB, BoE, BoJ, SARB, MNB, RBNZ, and BI diverge from market pricing.
• UK and Japanese fiscal policy turn more expansionary, triggering fiscal premia or pressure on local currencies.
• Debate over AI valuations and capital spending causes simultaneous declines in equities and bonds, triggering a carry unwind.
• Crowded yen short positioning and potential intervention create the risk of a sudden reversal.
• Emerging-market currencies are hit jointly by the USD, oil prices, and the credibility of local policy.

What to watch

• Next week's FOMC decision and changes in market pricing for cumulative rate hikes.
• Whether oil prices and European natural gas prices remain elevated.
• Fiscal spending and financing arrangements ahead of the UK's autumn budget.
• Whether the Japanese government pushes consumption tax cuts, repatriation policies, or FX intervention.
• South Africa's upcoming fiscal data and revenue performance.
• Australian CPI and New Zealand's subsequent inflation and the RBNZ hiking path.
• BI's policy response to FX pressure, foreign capital inflows, and the inflation-target framework.
• Whether implied volatility continues to remain below potential macro risks.