Both the Dollar Index and EUR/USD are trading at levels last seen in late August. Commerzbank economists analyze the bullish levels of EUR/USD.
First USD weakness, then EUR strength?
The idea of an exceptionally hawkish Fed is wrong. The Fed could act more aggressively than other central banks. In case inflation rises around the world and tighter monetary policy is required everywhere, that means: Raise interest rates faster and further than everyone else. However, conversely, that also means that once inflationary pressure subsides, the Fed is typically one of the first central banks to lower interest rates again. This is unlikely to be positive for the USD.
Even without further idiosyncratic USD strength, EUR/USD would have greater upside potential simply because, in our view, the market is increasingly mispricing the ECB. Until the end of next year, the ECB’s interest rates would have to fall by about 100 basis points for the market’s bet to work. According to our economists, that is too much.
Call it inertia of the ECB or simply lack of room due to the disappointing slowness of the fall in core inflation: whoever believes (as we do) that the ECB will lower official interest rates much later and much more slowly than the market expects , will expect a rise in EUR/USD levels, simply because the strength of the EUR should be added to the USD weakness that we have been observing in recent weeks.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
