Since the middle of last week, the USD has weakened day by day, causing higher EUR/USD levels. There is still no sign of anything on the EUR side that could contribute to this movement, Commerzbank’s Head of FX and Commodity Research Ulrich Leuchtmann notes.
A USD-negative view is justified
“The market considers a large 50-basis-point move by the Fed at tomorrow's meeting to be increasingly likely (now more likely than a small 25-basis-point step), and that has taken its toll on the USD. A large move does not necessarily imply that the rate-cut cycle will end lower than the market had previously expected. A terminal rate of around 2¾ % is still the scenario priced in by the market. And yet a more aggressive start to the rate cuts is rightly seen as USD-negative.”
“We have recently tried to show that (1) inflation expectations point to the 2% inflation target being reached, but so far there is no evidence of a significant undershoot. And we showed (2) that the US labor market has cooled, but continues to perform almost as well as in the goldilocks year of 2019. Sure, there are risks. The labor market could cool down rapidly, and of course inflation could plummet. But of course, things could also turn out differently.”
“A 50-basis-point move would suggest that the Fed's reaction function is more negative for USD than could be assumed just recently. And that would not only be relevant for the current interest rate, but would increase the risk that in the future the Fed would be more likely to cut rates in case of doubt. This basically confirms our USD-negative view: in interest-rate-cutting cycles, the Fed is more aggressive than most other central banks. Such phases tend to be USD-negative because they make the dollar appear riskier. A higher risk premium on USD positions, i.e. a weaker US dollar, is the logical consequence.”
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Recommended content
Editors’ Picks
AUD/USD consolidates near 19-month peak as traders await US PCE Price Index
AUD/USD oscillates in a range below the 0.6900 mark, as traders opt to move to the sidelines ahead of the US PCE Price Index. In the meantime, the RBA's hawkish stance, the optimism led by additional monetary stimulus from China, the prevalent risk-on mood, and a bearish USD continue to act as a tailwind for the pair.
USD/JPY holds above 145.00 after the Tokyo CPI inflation data
The USD/JPY pair attracts some buyers to near 145.20 on Friday during the early Asian session. The pair gains ground near three-week highs after the Tokyo Consumer Price Index. The attention will shift to the US Personal Consumption Expenditures Price Index for August, which is due later on Friday.
Gold price holds steady near record peak; looks to US PCE data from fresh impetus
Gold price consolidates below the all-time high set on Thursday amid overbought conditions on the daily chart and the risk-on mood, though dovish Fed expectations continue to act as a tailwind. Bulls, meanwhile, prefer to wait for the release of the US PCE Price Index before placing fresh bets.
Ethereum investors show bullish bias amid ETF inflows and positive funding rates, exchange reserves pose risk
Ethereum traded around $2,640 on Thursday, up more than 2% following increased bullish bias among investors, as evidenced by ETH ETF net inflows and an uptrend in funding rates. However, investors may be wary of a potential correction from ETH's rising exchange reserve.
RBA widely expected to keep key interest rate unchanged amid persisting price pressures
The Reserve Bank of Australia is likely to continue bucking the trend adopted by major central banks of the dovish policy pivot, opting to maintain the policy for the seventh consecutive meeting on Tuesday.
Five best Forex brokers in 2024
VERIFIED Choosing the best Forex broker in 2024 requires careful consideration of certain essential factors. With the wide array of options available, it is crucial to find a broker that aligns with your trading style, experience level, and financial goals.