The Dollar will have to wait and see – Commerzbank

FX market’s reaction to today’s Fed meeting will not depend very much on the expected 25 bps rate hike but on everything else surrounding the meeting, Esther Reichelt, FX Analyst at Commerzbank, reports.

Expectations of rate cuts are likely to be pushed back further into the future

We have underlined often enough that 25 bps more or less make no difference for the valuation of the Dollar. In my view, the most important point is: due to this intensified form of data dependence the Fed is likely to control market expectations of imminent rate cuts, which in turn is likely to be relevant for the Dollar outlook.

It is quite possible that the Fed will maintain the terminal rate for some time before considering rate cuts. Until it is clear whether the rate hike cycle really is over, the expectations of rate cuts are also likely to be pushed back further into the future.

In the end, the prospect of rate cuts is likely to initiate the next episode of sustainable Dollar weakness in particular as our central bank experts expect that the ECB will keep its key rate at the terminal rate next year, contrary to market expectations. However, that will only become an issue over the coming months. Today the focus instead rests on the fact that it is simply too early to have this discussion. For now, the Dollar will have to wait and see.

See – Fed Preview: Banks see a 25 bps hike as “a done deal”, focus on forward guidance