FX market is well-advised not to write off the US Dollar completely – Commerzbank

The FX market is well-advised not to base too much USD weakness on this new FOMC approach and to wait and see first. There are three reasons for that, according to economists at Commerzbank.

USD-positive risks exist 

“Nobody can say with any certainty to what extent credit conditions will be tightened medium-term. Not even the Fed. If for example, everything is sunny and happy again the Fed might revise yesterday’s approach towards a steeper rate path. What is of particular relevance over the coming weeks is to what extent lending by US banks will change.”

“The ‘dots’ have shifted slightly to the upside compared with December. Without the currently expected tighter credit conditions, the FOMC would be much more aggressive. That is why there are risks towards USD strength too.”

“In the end, there is still a large discrepancy between market and FOMC expectations. It has increased as a result of last week’s events and was confirmed yesterday by the FOMC: the market expects rapid rate cuts; the FOMC does not expect that it will do that.”