Euro: Weak as Fed credibility supports Dollar near term – Commerzbank

Commerzbank’s Thu Lan Nguyen argues that the unanimous Federal Reserve rate hike has temporarily restored its credibility and supported the Dollar, prompting a cut in the EUR/USD year-end forecast to 1.15 from 1.17. While both Fed and ECB are seen delivering one more hike this year, Commerzbank expects subsequent rate expectations to be revised down, ultimately weighing more on the Dollar than the Euro and lifting EUR/USD toward 1.18 by end-2027.

Fed support now, Dollar risk later

"As we expect the Fed to deliver one additional rate increase before year-end, major doubts about the central bank’s credibility are unlikely to resurface in the near term. We have therefore lowered our EUR/USD forecast for year-end from 1.17 to 1.15. Previously, we had expected the Fed to leave rates unchanged."

"For next year, however, we maintain our view that the Fed will not tighten monetary policy as aggressively as markets currently expect. Assuming the crisis in the Middle East gradually subsides, as we anticipate, the current inflation shock should also fade over the course of next year, eliminating the need for further rate hikes. In fact, we see a good chance that the Fed will cut rates by the end of 2027."

"However, we believe market expectations for additional tightening have also gone too far. We expect only one further rate hike in December, followed by unchanged rates through the end of 2027."

"Consequently, the dollar is likely to face pressure not only from a downward revision of US rate expectations, but also from renewed concerns that Fed independence is being undermined by the White House. We therefore expect the dollar to come under greater pressure than the euro in the end, despite likely downward revisions to rate expectations on both sides of the Atlantic."

"Nevertheless, if relations between Iran and the US continue to improve, and energy prices consequently fall sharply, EUR/USD could well come under further downward pressure. However, we would not view any resulting dollar strength as sustainable."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)