“Disconnect”.  On one hand the market expects the Federal Reserve to once again lower its key rate significantly in 2023 whereas the Fed itself assumes that it will have to continue keeping its key rate at quite high levels for some time to fight inflation successfully and also seems willing to do so. Economists at Commerzbank expect the US dollar to stay strong.

USD to appreciate significantly if things develop as the Fed assumes

“‘Disconnect’ implies for the USD exchange rates: the risks clearly point towards USD strength.”

“If the Fed caves in, not that much will happen to the USD exchange rates. To assume the contrary, one would have to assume that there is a considerable segmentation between money market (on which the Fed projections are being priced in) and the FX market. That is possible short-term but unlikely.”

“At current, we project EUR/USD exchange rates of 0.98 by year-end, based on our house view that there will be Fed rate cuts next year. If the market tips and its disagreement with the Fed comes to an end, lower EUR/USD levels would also be possible.”