A relatively more restrictive Fed with a fall in inflation, the best situation for USD bulls – Commerzbank

EUR/USD is recovering from the brief period of weakness the exchange rate experienced yesterday. But economists at Commerzbank expect the greenback to find support from two fronts.

Arguments in favour of a USD recovery

“A strong labor market means that the economic slowdown is likely to be only moderate. An economic slowdown accompanied by a relatively robust labor market might still be classified by economists as a recession, but it is likely to be less relevant for USD exchange rates as it is likely to be flatter and require less monetary policy adjustment.”

“A relatively more restrictive Fed with an accompanying fall in inflation would be ideal. Let us not forget: in itself a fall in inflation (i.e. a reduced erosion of the Dollar’s domestic purchasing power) is a positive argument for the currency involved. Only a negative rate outlook might affect this image or might even reverse the situation. If that does not arise this is the best imaginable situation for USD bulls.”