Euro: Dollar Strength Seen as Sustainable - Commerzbank

The Federal Reserve's hawkish stance provides short-term support for the dollar, with EUR/USD showing signs of stabilizing below the 1.15 level. Commerzbank analyst Thu Lan Nguyen noted that this movement suggests the pair may have formed a cyclical bottom, and the current dollar strength is sustainable in the near term, as the Fed has regained market credibility and the market has fully priced in another rate hike in December.

**Short-term logic: Fed path underpins the dollar**

The bank's economists have adjusted their forecasts, now expecting the Fed to hike rates again in December, with the first rate cut not anticipated until the fourth quarter of next year. This path is broadly aligned with current market pricing, providing solid rate support for the dollar. Against this backdrop, Commerzbank expects EUR/USD to hold near 1.15 through year-end. At the time of writing, EUR/USD was trading around 1.14791, still below this key psychological level.

**Medium-term divergence: options market shows skepticism**

Despite the seemingly clear short-term direction, the options market sends a different signal. Nguyen cautioned that investors are not fully convinced of the durability of dollar strength, with market pricing still implying the possibility of a reassessment of the Fed's policy path. This divergence suggests that if future economic data or geopolitical developments prompt the market to lower its expectations for Fed rate hikes, the dollar could face renewed downside pressure.

**Long-term outlook: dollar weakness delayed, not canceled**

The bank's medium-term view holds that the dollar's cyclical weakening is merely delayed, not canceled. As U.S. policy and political factors gradually weigh on the dollar, Commerzbank expects EUR/USD to gradually recover to 1.18 by end-2027. Market reports indicate that a shift in the market's perception of Fed independence, or the start of a trend decline in U.S. rate expectations, could both serve as catalysts for a dollar turnaround.