Euro: Dollar weakness delayed as Fed stays hawkish – Commerzbank

Commerzbank’s Volkmar Baur notes that EUR/USD stabilized after the Federal Reserve’s hawkish surprise, with markets now fully pricing another Fed rate hike in December and no cuts until late next year. The bank has adjusted its forecast, expecting EUR/USD to hold near 1.15 through year-end before gradually rising, targeting 1.18 by end-2027 as US policy and politics weigh on the Dollar.

Fed path keeps Dollar supported

"Following Wednesday’s hawkish surprise, EUR-USD stabilized somewhat yesterday. The market hence reacted positively to the Fed meeting also at second glance. Despite higher policy rates and slightly increased interest rate expectations for the Fed over the next 12 months, long-term interest rates tended to fall yesterday."

"Following the interest rate decision, our economists have adjusted their expectations regarding the Fed and now also anticipate another rate hike in December, with the first rate cuts not expected until the fourth quarter of next year. Such a scenario would be in line with market expectations, just as our expectation of another key interest rate hike by the ECB (also in December) is already fully priced into the market."

"As a result, we have also adjusted our forecast and now expect the EUR/USD exchange rate to remain virtually unchanged at 1.15 through the end of the year."

"Although two further rate hikes by the ECB are also priced in for next year, as soon as it becomes clear next year that the Fed’s next move is likely to be a cut, the US dollar should come under slight pressure again against the euro."

"In addition, the US dollar is likely to continue suffering from the US government’s erratic policies next year, which justifies a slight risk premium. We therefore see the EUR/USD exchange rate at 1.18 by the end of 2027."

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