The US Dollar stays on the back foot as markets position themselves for a smaller Federal Reserve rate increase. A possible cut of interest rates by the end of next year is the cornerstone of the USD weakness, economists at Commerzbank report.

Monetary policy is swinging to a more sustainable path

“Powell sounded a little dovish, emphasizing the high uncertainty for the inflation outlook and the risks that would be associated with a premature easing. Nevertheless, for the time being, the only thing that seems relevant for the financial markets is that Fed monetary policy is ‘normalizing.’ The 75 bps rate hikes to compensate for the too-long hesitation in 2021 are history.”

“Monetary policy is swinging to a more sustainable path. And that means that if inflation declines significantly next year and fears of a recession materialize, the market believes that interest rate cuts could be justified again as early as the end of 2023 which is the cornerstone of the USD weakness we also expect over the coming year.”