US Dollar: Near-term gains limited as Fed pause draws closer – Commerzbank

A December Fed rate rise is priced in, although Commerzbank expects no further tightening beyond that point. With next week’s Federal Reserve and ECB meetings approaching, the bank’s Antje Praefcke sees limited scope for Dollar gains over the coming days. Only second-tier US data are due, while risks in the Middle East are providing no fresh support. Against that backdrop, Praefcke expects EUR/USD to remain relatively stable and sees little justification for a significant rise in the Dollar.

Dollar upside remains constrained by Fed outlook and risk sentiment

"For October - that is, next week - a rate hike by the Fed is generally no longer expected. Instead, a hike in December is already priced in. Furthermore, the market still sees a chance that another hike could come by the middle of next year. Our experts, however, do not foresee any further hikes after December. If the Fed delivers a hawkish pause next week, the dollar could gain some ground, at least in the short term. Any deviation from a restrictive stance - which would cause the market to revise its expectations downward, especially for next year - is likely to put the dollar under pressure."

"Only second-tier macroeconomic data is on the agenda this week. Furthermore, the resilience of the US economy is now well known and, in my view, already priced in. Even with strong data, the dollar is therefore unlikely to gain much ground."

"And what about the Middle East conflict? Yes, the dollar typically strengthens during periods of heightened risk aversion. However, there is currently no additional impetus coming from the Middle East that would drive the dollar higher in its role as a safe haven. In my view, an easing of the conflict would actually be likely to lead to a sustainable, notable correction in the dollar - something we could see yesterday in response to unconfirmed rumors about an agreement, when the oil price and the US dollar dipped shortly."

"The bottom line is that, in the short term, I see little reason for the dollar to gain significant ground."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)