Jim Bullard, President of the St. Louis Fed, introduced the idea of 75bp rate steps yesterday. The FX market received Bullard’s comment in a USD-positive manner. Nonetheless, economists at Commerzbank consider any USD strength resulting from these comments to be exaggerated.

Risk of a recession increases the more quickly the Fed pulls up its key rate

“The market is not confident that either the US economy or the Fed will be able to cope with 3.5% as Bullard expects, because it is assumed that this would lead to a recession and that at this stage the Fed would give up on a restrictive approach of this scale again.”

“The risk of a recession increases the more quickly the Fed pulls up its key rate. I would not be surprised if the same FX traders who are currently reacting to Bullard’s comments with USD strength would then be the first to sell the dollar again. And that is exactly why I consider any USD strength resulting from these comments to be exaggerated.”

“At least for as long as one cannot be certain that (a) radical rate hikes will lead to a recession or (b) the Fed would end its restrictive monetary policy in case of a recession.”