Asymmetric USD risks – Commerzbank
Many of the readers pay particular attention to the EUR/USD exchange rate. The fact that it rose so sharply yesterday and this morning could easily be interpreted as an effect of yesterday's ECB decision. But that would be a mistake, Commerzbank’s FX Head of FX and Commodity Research Ulrich Leuchtmann notes.
USD short positions are likely to appear more attractive
“The EUR/USD movement since the evening before yesterday was exclusively USD weakness. EUR didn't move at all. I think the reason for the Greenback weakness is obvious: it is clear to everyone that a 50-basis-point move by the Fed next Wednesday is a serious possibility. Some market participants may have long perceived a 50 basis point move as an unlikely possibility.”
“Because the labor market is still not in as dramatic a situation as it usually is when the Fed makes major interest rate moves, because interest rate hikes are tricky during a presidential election campaign anyway, and a big one even more so, because the Fed is unlikely to share the market's extremely low inflation expectations, which are probably driven more by fears of recession than by cool economic analysis.”
“For the currency market, there is another argument: those who are bullish on the USD because they expect the Fed to cut interest rates slowly in the medium term would be instantly refuted by a 50 basis point move on Wednesday. But those who are USD-bearish because they expect a rapid pace of interest rate cuts in the medium term would not have to capitulate if there are only 25 basis points on Wednesday. The risks of USD positions next week are likely to be asymmetrical. For risk-averse investors who are undecided between 25 and 50 basis points, USD short positions are likely to appear more attractive than USD long positions. This is already weakening the USD.”
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FXStreet Insights Team
FXStreet
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