Euro: Downside risks build as Fed stays restrictive – Commerzbank

Commerzbank’s Antje Praefcke highlights that political uncertainty in France and renewed US rate hike expectations are weighing on the Euro against the Dollar. She notes that stronger US inflation has revived October Fed hike pricing, even as Commerzbank still expects no move until December. Overall, she judges current risks for EUR/USD as tilted to the downside.

French politics and Fed expectations weigh

"The negative newsflow from France is therefore unlikely to subside anytime soon and should remain a lingering headwind for the euro."

"At the same time, following the stronger-than-expected US inflation data, market expectations of a Fed rate hike at the October meeting have picked up again. Our experts still expect the Fed to leave its key interest rate unchanged at the end of the month. This view is also supported by comments from several FOMC members in recent days, who have remained vigilant about price pressures and favour another rate hike, but do not appear overly alarmed."

"There is therefore sufficient room for the Fed to stay on hold on 28 October, just under a week before the midterm elections, even though the market is already pricing roughly a 50:50 chance of a move in three weeks’ time. By contrast, a December hike now looks like a “done deal”."

"What we hear from Fed officials before the blackout period begins on Saturday is likely to point in the same direction. Even so, markets will be paying particular attention to Fed Chair Kevin Warsh’s appearance at the IMF Annual Meetings in Bangkok on Friday morning."

"But even if Warsh does not provide any clear signals, especially as his discussion with IMF Managing Director Kristalina Georgieva will focus on “the forces reshaping the global economy”, the September inflation figures are likely to reinforce the market’s underlying perception that the Fed will remain restrictive. As a result, any positive macro data released over the coming days should keep rate hike expectations alive."

"France is a headwind for the euro, while rate expectations are supporting the dollar. One currency’s pain is another’s gain. For now, I think the risks to EUR/USD are tilted to the downside."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)