“Disconnection”. On the one hand, the market expects the Federal Reserve to lower its key rate significantly again in 2023, while the Fed itself assumes that it will have to keep its rates quite high for some time to successfully fight inflation. And she seems willing to do it too. The Commerzbank economists expect the US dollar to remain strong.
USD Will Appreciate Significantly If Things Play Out As Fed Supposes
“Risks clearly point to USD strength.”
“If the Fed relents, not much will happen to USD exchange rates. To assume otherwise, one would have to assume that there is considerable segmentation between the money market (where the Fed’s projections are being quoted) and the market. This is possible in the short term, but unlikely.”
“Nowadays, we project EUR/USD exchange rates of 0.98 by the end of the year, based on our house view that there will be Fed rate cuts next year. If the market tilts and its disagreement with the Fed comes to an end, lower EUR/USD levels would also be possible.”
Source: Fx Street
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