Fed rate cuts on fight against inflation would do little harm to the greenback – Commerzbank

How long can inflation surprise on the upside? In the event the Federal Reserve cuts rates in order to fight inflation, the US dollar is unlikely to sustain a downmove, economists at Commerzbank report.

Exorbitant USD optimism would be inappropriate on high inflationary momentum despite US recession

“If the Fed is considering more aggressive interest rate moves despite the growing risk of recession in the US, this has a signaling effect. It signals that the Fed is prioritizing the fight against inflation. All of this presupposes, of course, that a US recession would actually be capable of breaking the inflation dynamic so significantly that interest rate cuts would then also be possible from an inflation-fighting perspective. If this were to happen (and this is implied by inflation expectations), Fed rate cuts would do little harm to the greenback.”

“If, contrary to market expectations, inflationary momentum were to remain at a higher level despite the US recession, the Fed would soon find itself in a similar conflict of objectives as the ECB would be in the event of a European gas crisis: torn between fighting inflation and fighting recession. Exorbitant USD optimism would then be inappropriate.”