There is still some scope for further Dollar weakness – Commerzbank

US inflation came slightly lower than had been expected. Economists at Commerzbank analyze USD outlook after the US CPI report.

A small surprise in US CPI, a giant jump in EUR/USD

The majority of analysts had expected that the core rate would stand at 0.3% (MoM, seasonally adjusted), but it turned out to be just under 0.2%. ‘So what?’ one might wonder. That does not mean that the inflation issue in the US has now been solved. We might see setbacks over the coming months.

Greenback weakened significantly after the data release. One might ask if an inflation surprise of relatively small absolute magnitude can justify such market reaction. But we've seen similar patterns before. At recent levels, USD exchange rates obviously had priced in quite an unrealistic level of Fed tightening. That part of the USD exchange rates had to be corrected quite quickly.

The prospect of a reduced USD carry is putting pressure on a currency. That bit is the simple part of the story. However, there is one complication. As it is not just the terminal rate that matters (i.e. the rate peak) but also a matter of how long interest rates remain at this high level. That means: there is still some scope toward further Dollar weakness. Wednesday’s market move does not have to constitute the end of the USD weakness.