The short-term outlook for the US dollar suggests recovery potential despite current challenges. Recent backtracking by the US administration may reduce recession risks and lessen the urgency for the Federal Reserve to implement rapid interest rate cuts.
Commerzbank economists expect the first rate cut in September, contrasting with market expectations for June. The forecast for EUR/USD has been raised to 1.08, indicating that US tariff policy may have a lasting negative impact on the dollar.
Us Government’s Efforts And Currency Implications
The US government’s efforts to address the trade deficit could lead to a weaker dollar, with potential intervention from the president if currency appreciation occurs. Additionally, issues related to tariffs have eroded confidence in the dollar’s status as a safe-haven asset, prompting some investors to move away from US Treasuries.
The forecast for EUR/USD at the end of 2026 has been revised from 1.10 to 1.15, reflecting these developments.
What we’re seeing here is a market balancing between opposing forces. On one side, recent political steps in Washington have removed some of the near-term fear around a major slowdown. That takes some of the weight off the US central bank and delays pressure to slash rates in a hurry. On the other hand, shifts in policy—especially those tied to trade—have started to chip away at investor confidence in the dollar. It’s not collapsing, but it no longer holds the same automatic trust for safety-first investing.
Traders and macro thinkers should note that Commerzbank’s move to push its rate-cut expectations to September isn’t simply a guess; it’s based on their reading of cooling inflation data and a less urgent economic backdrop. This goes against markets, which seem a bit more eager, still looking at a possible move in June. The divergence matters. Betting too early on cuts being pulled forward could prove costly if monetary policy ends up less flexible than priced in.
Market Reactions And Structural Shifts
The upgrade in the EUR/USD path to 1.08 short term, and now 1.15 in the longer run, reflects more than euro strength—it’s a reaction to structural shifts in the US approach to global economics. When we think about what the administration is doing to shrink deficits, particularly through tariff expansion or threats thereof, it sends a message. That message is dollar-negative, especially when it hints at a less open trade framework or hints at artificial support to fix exchange rate levels. These have real consequences for dollar valuation, particularly in the options space where tail hedging is sensitive to clear policy signals.
Should the dollar strengthen too quickly due to yield differentials or haven flows, there’s a belief that an aggressive public response from the president might follow. Those public remarks may be perceived as an attempt to talk down the currency, which can move pricing expectations in forward contracts and options skew. For traders, that opens opportunity—but also adds noise. Monitoring rhetoric day-by-day becomes necessary because price discovery is no longer solely economic; it’s also narrative-driven.
What’s especially clear is that some market participants are repositioning. The continued shift away from US Treasuries doesn’t come from yield levels alone. Rather, it’s rooted in doubts about long-term consistency in US policy. When reserve managers or sizable funds lose confidence, volatility around rates and FX can rise. For us, that suggests more fragmented exposure is safer. Building in room for dollar softness in the second half of the year is no longer just a scenario—it’s moving towards the base case for more desks.
In short, while dollar support from rates may persist a bit longer, trade policy and political guidance are weakening its structural floor. That’s a different type of pressure than we saw last year, when inflation did all the heavy lifting. So, traders need to reposition slowly and don’t blindly follow short-term macro signals without looking at the broader picture. Volume in tail-risk protection products may pick up. We expect demand for convexity in EUR/USD to rise, and possibly volatility at the long end of the curve to increase, especially as the Fed messaging gets further from consensus pricing.
