Dollar's Hawkish Narrative Cracks Amid Reassessed Rate Expectations

Commerzbank's Thu Lan Nguyen expects the US Dollar's current support from perceived hawkish Federal Reserve policy to fade as markets reassess United States rate expectations over coming quarters.

The dollar's strength is moderating, according to Nguyen, due to a reevaluation of US rate hike expectations. Markets still price in further hikes, but Nguyen believes these expectations are overly optimistic and expects a reassessment of the rate outlook.

As US-Iran tensions ease towards year-end, inflationary pressures should moderate considerably next year, allowing the Fed to shift its focus from fighting inflation back to supporting growth, potentially even resuming its rate-cutting cycle. This would revise US rate expectations lower over the coming quarters and weigh on the dollar.

Although this depreciation is unlikely to be as pronounced as initially assumed due to an increased risk of the Fed hiking rates in the next few months, Nguyen still forecasts EUR/USD at 1.19 by end-2027, down from a previous target of 1.21.