Fed now the dove and ECB the hawk – Commerzbank

The Bank of England and the Fed were expected to cut rates slightly less than the ECB. That changed after the US employment report in early August. Fed expectations have decoupled from those of the Bank of England and caught up with those of the ECB. More interesting, however, is the subsequent disengagement in recent weeks. The market now expects the Fed to do more than the ECB this year, that is to pursue a more “active” monetary policy, as my boss would say, notes Commerzbank FX analyst Michael Pfister.

EUR/USD probably won’t be able to stay higher in the long term

“Our economists anticipate about the same number of interest rate cuts as expected from the Fed, while the ECB is likely to cut significantly less. As a result, not only is the gap already established in monetary policy, which has driven EUR/USD to the 1.12 level, to be expected, but the gap is likely to widen further in the coming months.”

“This is also important because, as already mentioned, the underlying conditions differ significantly. In the US, we see a stronger real economy and higher inflationary expectations at the same time, while in the euro area the real economy is weakening and the market expects, at best, mild inflationary pressure.”

“The more accommodative monetary policy associated with the Fed should keep EUR/USD moving higher if our economists are right. Given the significantly stronger US real economy, however, I have my doubts that EUR/USD will be able to sustain higher levels in the long term.”