Commerzbank’s Thu Lan Nguyen notes that EUR/USD has stabilized just below 1.15 after a hawkish Federal Reserve (Fed) meeting, indicating a possible floor. Nguyen views current Dollar strength as sustainable in the short term, as the Fed has regained credibility and another rate hike in December is expected. However, options markets suggest investors remain unconvinced about the durability of this Dollar strength.

Fed credibility supports Dollar

"EUR/USD has stabilized at levels just below 1.15, suggesting that the pair may have found a floor following last week's hawkish Fed meeting. As my colleague already argued on Friday, we consider the dollar's strength as sustainable, at least in the short term. The rationale is straightforward: the Fed has regained credibility."

"With both markets and ourselves expecting another rate hike in December, that credibility is likely to remain intact for the time being. The US dollar's positive reaction to last week's Fed meeting, however, revealed something else as well."

"Although further US rate hikes had already been largely priced in and longer-term inflation expectations had remained stable near the Fed's inflation target, there apparently remained some doubt as to whether the central bank would actually be willing to raise rates sufficiently quickly and decisively."

"The key question, therefore, is whether the Fed has now completely dispelled those doubts. That is far from certain. EUR/USD risk reversals have declined somewhat recently, meaning that hedges against euro weakness are currently slightly more expensive than hedges against dollar weakness."

"However, we remain a long way from the levels observed before the start of the current Trump presidency. This suggests that, despite the Fed's latest communication, market participants are not yet fully convinced that the dollar's strength will prove durable."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)

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