EUR/USD: Potential for an upside correction over the coming months – Commerzbank

It took the Dollar a moment before it was able to benefit from Wednesday’s FOMC decision. Esther Reichelt, FX Analyst at Commerzbank, analyzes Greenback’s outlook.

Ammunition for the Dollar bulls

The really USD relevant change constituted the adjustment of the growth and labour market projections. Powell did not want to commit on this front during the press conference, but the updated projections paint the picture of a soft landing for the US economy, which would justify higher interest rates for longer. In my view, the Fed therefore confirmed exactly the narrative that has been supporting the USD rally since the end of July.

So what is decisive for the medium-term USD outlook is whether these projections will actually materialise. Our economists remain sceptical and see clear downside risks for the US economy. Experience teaches us: as soon as the economy disappoints or the adjustments on the labour market have an effect on the unemployment rate the market is likely to price in more significant rate cuts after all, with the dollar suffering as a result. We therefore continue to see the possibility of an upside correction in EUR/USD over the coming months.