USD Weakness Continues to Dominate FX Market Discourse

Commerzbank’s Head of Foreign Exchange and Commodity Research, Ulrich Leuchtmann, observes that the EUR/USD is holding at 6-month highs, while the US Dollar Index is holding near 6-month lows. Both of these trends are interesting to notice.

Eurozone is Experiencing a Recession

The falling value of the US dollar is still the most talked about on the foreign exchange market. This is because the market still doesn’t believe the Fed when it says it won’t lower the key rate. Since the FOMC’s last meeting, it has made some minor changes to its forecast, but these changes are minor.

This level of skepticism doesn’t come as a big surprise since the FOMC members have been wrong with their predictions far too often. He still recalls their ridiculous dots from 2009 and the years that followed. In hindsight, they were ridiculous.

In contrast, everyone in Europe who spent New Year’s Eve in a T-shirt is likely to feel less anxious about petrol scarcity. This is because of the way that they dressed. This thing that was putting pressure on the euro and weakening it in Q4 is now going away much more quickly.

This factor had already started to lessen in Q4. Undoubtedly, a recession is on the horizon for the Eurozone. If, on the other hand, this recession is “just” caused by a tightening of monetary policy, it won’t be as bad for the EUR exchange rates as one caused by a lack of gas.

In contrast to the United States, where the Federal Reserve is taking a much more aggressive approach to monetary policy, the foreign exchange market seems to think that the European Central Bank’s strategy is no longer so bad.

The workers in macro research frequently raise the long-term inflation concerns posed by the European Central Bank’s (ECB) more conservative approach to interest rate policy.

There is no reason to believe these threats will be severe enough for the FX market. It will still take some time until it factors in these charges. He is still determining if this will become a problem this year or, more likely, become the topic of the assessment for 2024. If it does become a problem, it will be in 2024.

More USD Devaluation If US Inflation Continues to Decline in the Coming Months

After the Consumer Price Index (CPI) numbers kept going down in November, the US dollar lost a lot of value in December. If US inflation keeps falling during the next month, Commerzbank economists predict the greenback will continue its downward trajectory.

Not only does it seem logical that the Fed chair would announce slower rate hikes, but it also seems typical for the Fed chair to talk more regularly about the end of the Fed’s rate hike cycle. It’s possible that he doesn’t want it to take place, especially if he believes that giving up the fight against inflation too soon will have even more disastrous effects than delaying it for too long.

On the other hand, any hawkish comments he makes could be seen as a defensive move, so they might have less of an effect on the USD than they would have had when inflation pressure was higher. Nonetheless, his statements may continue to be hawkish.

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