US Dollar: Short-term upside capped as Fed pause looms – Commerzbank

Commerzbank’s Antje Praefcke notes that the Dollar faces limited upside in coming days as markets await the Federal Reserve and ECB meetings next week. A December Fed hike is priced in, but no further tightening is expected by Commerzbank. With only second-tier US data and Middle East risks not adding fresh support, Praefcke expects relatively stable EUR/USD and sees little reason for significant Dollar gains.

Fed path and risk sentiment constrain Dollar

"For October - that is, next week - a rate hike by the Fed is generally no longer expected. Instead, a hike in December is already priced in. Furthermore, the market still sees a chance that another hike could come by the middle of next year. Our experts, however, do not foresee any further hikes after December. If the Fed delivers a hawkish pause next week, the dollar could gain some ground, at least in the short term. Any deviation from a restrictive stance - which would cause the market to revise its expectations downward, especially for next year - is likely to put the dollar under pressure."

"Only second-tier macroeconomic data is on the agenda this week. Furthermore, the resilience of the US economy is now well known and, in my view, already priced in. Even with strong data, the dollar is therefore unlikely to gain much ground."

"And what about the Middle East conflict? Yes, the dollar typically strengthens during periods of heightened risk aversion. However, there is currently no additional impetus coming from the Middle East that would drive the dollar higher in its role as a safe haven. In my view, an easing of the conflict would actually be likely to lead to a sustainable, notable correction in the dollar - something we could see yesterday in response to unconfirmed rumors about an agreement, when the oil price and the US dollar dipped shortly."

"The bottom line is that, in the short term, I see little reason for the dollar to gain significant ground."