Commerzbank’s Volkmar Baur notes that despite easing Oil prices and lower inflation expectations, market pricing still anticipates at least one more Federal Reserve rate hike by year-end, while the ECB is seen delivering only one further move to 2.5%. Revised US GDP and income data show a smoother economic backdrop, supporting continued Dollar strength even as debt-financed tech investment poses risks.

US growth and rates back Dollar

“Since then, as we know, the oil price has fallen significantly. Most recently, it even briefly dipped below the closing level of February 27 – that is, the level prior to the Iran conflict. Lower inflation is therefore to be expected, and consequently, central banks would need to take less action.”

“By year-end, the market (just like us) expects a key interest rate of 2.5%, meaning another hike. However, market expectations for the Fed have not fallen. On the contrary.”

“As of today, the market expects at least one interest rate hike by year-end – even though inflation expectations have fallen significantly over the past two weeks and are now even lower than they were at the beginning of the year.”

“A closer look at the details of GDP growth reveals that while private consumption accounts for nearly 70% of U.S. GDP, it contributed only 40 basis points to that 2.1% in the last quarter. The subcategory “data processing equipment” within the capital expenditures category, on the other hand, accounts for only 3% of GDP but contributed more than half of the growth.”

“However, that does not mean that the U.S. dollar’s strength cannot continue for a while longer.”

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