Market not following the FOMC’s view at all, weak USD is justified – Commerzbank

Neither the dots nor Fed Chair Powell’s press conference had much of an effect on the USD exchange rates. The market doesn’t believe Powell and the FOMC. But if the Fed is correct, the US Dollar could strengthen substantially, economists at Commerzbank report. 

Powell unable to convince the market

“The market doesn’t believe Powell and the FOMC. It doesn’t believe that the Fed’s key rate really will be that high by year-end 2023. In the interim 5% are consistent with the market view. But for year-end 2023 the market only expects 4.35%. Powell’s words did not change that one bit. I don’t remember seeing the market ignore the message of a Fed chair so clearly.”

“Inflation swaps are pricing in CPI inflation of 2.5% for the 1-year horizon, whereas the FOMC expects PCE inflation rates of 3.1% for about the same period of time. Converted into CPI that would correspond to approx. 3.7%. So once again the market’s and the FOMC’s economic projections differ widely and as a result, so does the rate outlook.”

“At some point, the development of US inflation will show who was correct. If it is the Fed USD is likely to appreciate significantly. If it is the market a weak Dollar is justified. Probably even slightly weaker than at present. Because there is one USD-bullish risk less at that stage. Because our economists concur more with the market view, I obviously expect a moderately weaker greenback for 2023.”