Euro: Weak as Fed credibility supports Dollar near term – Commerzbank

Commerzbank's Thu Lan Nguyen contends that the Federal Reserve's unanimous rate hike has momentarily bolstered its credibility and bolstered the Dollar, leading to a reduction in the EUR/USD year-end forecast from 1.17 to 1.15. While the Fed and ECB are both anticipated to raise rates one more time this year, Commerzbank predicts that future rate expectations will be revised downward, consequently impacting the Dollar more than the Euro and driving EUR/USD closer to 1.18 by year-end 2027.

The Federal Reserve is expected to deliver one additional rate increase before the year concludes, and doubts regarding the central bank's credibility are not expected to resurface in the near future. Nevertheless, Commerzbank anticipates that the Fed will not implement monetary policy as aggressively as markets presently anticipate for next year.

Assuming the crisis in the Middle East stabilizes, as expected, the recent inflation shock should dissipate over the course of next year, eliminating the requirement for further rate hikes. In essence, the dollar is poised to face pressure from a downward revision of US rate expectations, along with renewed concerns about the Fed's independence being compromised by the White House.