EUR/USD has further upside potential – Commerzbank
Both the USD Index and EUR/USD are trading at levels last seen at the end of August. Economists at Commerzbank analyze expect rising EUR/USD levels.
First USD-weakness then EUR-strength?
The idea of an exceptionally hawkish Fed is incorrect. The Fed might act more aggressively than other central banks. In case of globally rising inflation and a more restrictive monetary policy being required everywhere that means: it hikes interest rates more quickly and further than others. However, conversely, that also means: once inflation pressure eases the Fed often is one of the first central banks to lower interest rates again. That is unlikely to be USD-positive.
Even without further US-idiosyncratic USD strength, EUR/USD would have further upside potential simply because in our view the market increasingly assesses the ECB incorrectly. Until the end of next year, ECB interest rates would have to fall by roughly 100 bps for the market’s bet to work out. According to our economists that is far too much.
Call it ECB inertia or simply a lack of scope due to a disappointingly slow fall in core inflation: anyone who believes (like we do) that the ECB will lower key rates much later and much more slowly than the market expects will expect rising EUR/USD levels simply because in addition to the USD-weakness we have been seeing over the past weeks there should then also be EUR-strength.
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FXStreet Insights Team
FXStreet
The FXStreet Insights Team is a group of journalists that handpicks selected market observations published by renowned experts. The content includes notes by commercial as well as additional insights by internal and external analysts.
