USD: Open-ended again – Commerzbank

Chairman Powell managed to surprise the market on Friday after all, putting pressure on the US dollar. Expectations had been gradually scaled back over the previous week, allowing the US dollar to benefit. On Friday, EUR/USD even traded in the 1.15 range once again. This reversed with Powell's speech. The market is once again pricing in more interest rate cuts, and EUR/USD reacted abruptly, losing around 1% within a very short time and trading above 1.17 again, Commerzbank's FX analyst Volkmar Baur notes.

USD might remain under pressure

"The assessment of the economic situation was not really new. Powell noted that job growth had slowed, but that this had not led to an increase in the unemployment rate. The labor market was therefore still in balance, even if this was an unusual balance because both labor demand and supply had declined. The assessment of inflation was also nothing new. Tariffs appear to be slowly finding their way into prices, but it is still assumed that these are one-off price increases. An inflation spiral is not expected, but it cannot be ruled out entirely and caution is advised."

"Although the assessment of the economic situation has not changed significantly, the risks were suddenly seen as much greater on the labor market side. While the minutes of the July meeting stated that inflation risks were assessed as higher and that the interest rate would therefore remain unchanged, Powell now refers to 'changing risks' that 'require an adjustment of the monetary policy stance.' Greater emphasis on the risk to the labor market and less emphasis on inflation suggests a change in the response function and thus a tendency toward looser monetary policy. And not just in September, but beyond."

"It is this last point in particular that put the US dollar under so much pressure on Friday. After all, we are not just talking about the increased likelihood of an interest rate cut in September. Lower interest rates are now also expected at all subsequent meetings. Whereas before Friday the market had assumed that the Fed would cut interest rates five times by the end of next year, by a total of around 125 basis points, there is now even a 50 percent chance of a sixth cut by the end of January. Perhaps even more importantly, whereas it had previously been assumed that the interest rate cycle would end at the end of 2026, the end of the cycle is now once again open for the market. The Fed will even cut interest rates six times by a total of 150 basis points in the coming months. If this happens, the US dollar will remain under pressure."