Dollar Gains Against Euro Set to Fade as Markets Reassess Rate Expectations
Commerzbank's Thu Lan Nguyen believes that the US Dollar's (USD) recent gains against major currencies, including the Euro (EUR), are likely to fade as markets reassess United States rate expectations over coming quarters. The current perception of a hawkish Federal Reserve (Fed) policy is seen as overly optimistic and may lead to a revision in rate outlook, weighing on the dollar.
The Fed's support for higher interest rates has been beneficial to the US currency, but this narrative has shown signs of cracking since the July FOMC meeting. Markets still price in further US rate hikes, but Commerzbank expects these expectations to be revised lower over the coming quarters.
A resolution of the US-Iran conflict is expected to ease inflationary pressures and lead to a shift in Fed focus towards supporting growth, potentially even resuming its rate-cutting cycle. This could result in a depreciation of the dollar, but Commerzbank notes that this is unlikely to be as pronounced as previously assumed.
The bank now sees EUR/USD at 1.19 by end-2027, down from its previous target of 1.21. The Euro's upside is seen as limited due to energy-related growth and rate headwinds, but it is expected to benefit more than the US currency from a resolution of the conflict.