The path of least resistance is not always the right one – Commerzbank

FXStreet Insights Team FXStreet

Following the US President's announcement on Monday night of a de-escalation in the tariff conflict with China, it was no surprise that the USD was able to recoup its losses from Friday. For weeks, we have been discussing when EUR-USD will finally break through the 1.18 level on a sustained basis. Now, however, we are trading below 1.16 again. Currently, the path of least resistance appears to be towards a stronger US Dollar (USD), Commerzbank's FX analyst Michael Pfister notes.

USD might stabilize in the coming weeks

"At first glance, this seems to contradict our forecast of higher levels. However, it is important to remember that, even with our forecast, lower EUR/USD levels were still possible. Provided there are no further escalations in the global trade conflict and the US president refrains from further action to undermine the independence of the Fed, market participants will gradually conclude that things are not so bad after all. After all, the US real economy continues to grow at a solid pace, the impact of tariffs on inflation has so far been modest, and the German growth miracle is still a long way off."

"So, one might think, there are many arguments for lower EUR/USD levels. However, one thing should not be forgotten: we have repeatedly emphasised that the risks are asymmetrically distributed. It is possible that the probability of the risks surrounding Fed independence, tariffs and the US shutdown not materialising is higher. In such a scenario, we are likely to see further stabilisation of the USD in the coming weeks."

"However, there is also a scenario in which we see an increasingly strong impact of US trade policy until the end of the year, with the Fed swinging even more strongly towards interest rate cuts. Although this scenario is maybe less likely, its impact on EUR/USD would probably be much greater. Just because these risks have not materialised for a long time does not mean they never will. Those who hold the Brazilian real will certainly have had a lot to say about this in recent days. The path of least resistance is not necessarily the best one."

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FXStreet Insights Team

FXStreet

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