Euro: Credibility restored supports Dollar – Commerzbank

Commerzbank's Thu Lan Nguyen reveals that the Federal Reserve's unanimous September rate hike has temporarily restored its credibility, causing the US Dollar to strengthen. This has led to a lower forecast for the Euro against the Dollar at 1.15 by year-end, down from 1.17. However, the bank expects both US and euro area rate expectations to be revised downward in 2027, potentially impacting the US Dollar more than the Euro and enabling EUR/USD to gradually increase.

The Fed is expected to deliver one more rate increase before the year ends, making it unlikely for credibility concerns to resurface soon. Despite this, the bank maintains that the Fed will not tighten monetary policy as aggressively as markets anticipate for next year, foreseeing a possible rate cut by the end of 2027. Lowering euro area rate expectations will also have a negative effect on the euro next year.

Yet, the dollar may still face pressure from both downward revisions to rate expectations and renewed doubts about the Fed's independence. If the relationship between Iran and the US improves, and energy prices drop sharply, EUR/USD could be further pressured. However, this outcome would be viewed as unsustainable.