USD weakness remains dominating subject on FX market – Commerzbank

Ulrich Leuchtmann, Head of FX and Commodity Research at Commerzbank, notes that EUR/USD stays near 6-month highs to start the new year and the US Dollar Index holds near six-month lows

Eurozone is facing a recession

"USD weakness remains the dominating subject on the FX market. Because the market still does not believe the Fed’s affirmations that it will not cut the key rate. It has revised its expectations a little since the last FOMC meeting, but not substantially."

"This mistrust must not surprise, as the FOMC members have been incorrect with their forecasts too many times in the past. I still remember very clearly their – in retrospect – absurd dots from 2009 and the following years."

"In contrast all those who celebrated New Year’s eve in a T-shirt in Europe are likely to feel less concerned about a shortage of gas. This factor that had been putting pressure on the euro, which had already eased in Q4, is thus disappearing even more quickly."

"Of course, the Eurozone is facing a recession. However, if this is one that is “only” due to a tightening of monetary policy it will not be as damaging for the EUR exchange rates as a recession caused by a shortage of gas would have been."

"And in comparison to the US where the real economy is having to deal with a much more aggressive Fed monetary policy the FX market seems to consider the ECB's policy as not that unattractive any longer."

"Our colleagues in macro research like to refer to the long-term risks of inflation of the more cautious ECB interest rate policy. These dangers are not likely to be concrete enough for the FX market yet. It will take some time yet before it prices these in. I am not sure whether that will become an issue this year or whether that is more likely to become the subject of my outlook for 2024."