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Political uncertainty could limit USD upside potential – Commerzbank

In the coming week, the focus will be on several economic data releases from the eurozone and the USA, as they could give a final hint at the next steps by the ECB and the Fed in March, according to Thu Lan Nguyen, analyst at Commerzbank.” In the US, a continuation of the slight uptrend of prices and wages should support the USD. That said, political uncertainty could rise significantly after ‘Super Tuesday’, which in turn would limit the upside potential of the USD”

Key quotes

“Uncertainty about the next steps of the ECB and Fed remains high. While the market estimation has probably hardly changed of late, and has therefore been trading sideways around the 1.10 mark for some days, key growth and inflation data will be published in the coming week, which could cause swings in one direction or the other ahead of the next ECB and Fed meetings.”

“US figures on the core PCE rate and the labour market should give a tailwind to the US dollar over the euro. Indeed, if the latest moderate upward trend in the rate price and wage inflation continues, the market should also start to bet more on a continuation of the interest rate hiking cycle in the not too distant future. In a similar vein, the slight recovery that we expect to see in the ISM index would dispel fears of a US recession.”

“This positive impetus for the dollar could be offset however if US political uncertainty starts to rise after the upcoming Super Tuesday (the primaries in 12 US federal states). If the radical presidential candidates are successful, this would likely raise doubts about an effective future US government and therefore weigh on the greenback.”

“On the other hand, still-weak price pressure in the euro zone could give a tailwind to speculation of an extensive package of measures by the ECB and weigh on the EUR. Combined with falling inflation expectations in the euro zone, which have meanwhile reached a new low, the ECB’s inflation target is not looking that good at the moment.”

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