USD: Fed reaction function supports strength – Commerzbank

Commerzbank’s Thu Lan Nguyen notes that the Dollar strengthened after the latest Fed meeting, driven by several smaller hawkish signals rather than a single major shift. Powell stressed that rate cuts depend on inflation moving toward target, while long-term expectations remain anchored. Markets feel vindicated in pricing fewer cuts as energy prices rise, supporting a stronger Dollar outlook.

Fed stance underpins Dollar resilience

"The US dollar gained ground following the Fed’s decision yesterday. The decisive factor was not one strong signal - after all, the statement was only slightly revised and the projections remained virtually unchanged - but rather a series of smaller ones."

"For instance, while the majority of FOMC members still expect an interest rate cut this year and next, Fed Chair Jay Powell emphasized during the press conference that any rate move ultimately depends on inflation trends. If there are no signs that inflation is moving toward the central bank’s target in the foreseeable future, rates would not be cut."

"While short-term expectations have risen significantly in light of the rise in oil prices, long-term expectations remain in line with the Fed’s inflation target. As long as this remains the case, the path to monetary policy easing should remain clear."

"This could indicate that it will not be easy for a future Fed Chair, Kevin Warsh, to shift the consensus toward significant interest rate cuts - especially if inflation remains elevated in the coming months."

"All in all, the market is likely to feel vindicated in its assessment of the Fed’s reaction function (i.e., fewer rate cuts due to higher energy prices) following yesterday’s slightly hawkish meeting."

"This means that the dollar will continue to appreciate for the time being if energy prices rise further. With the increasing risk of significant and prolonged supply disruptions in the wake of attacks on energy infrastructure in the Gulf region, the signs thus currently point to a strong dollar."

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