Neither a breakout nor a reversal: What OCBC, Commerzbank and ING expect from the US Dollar

Three banks agree the US Dollar (USD) is on solid footing for now, but none expects a decisive breakout or a sharp reversal soon. OCBC, Commerzbank and ING credit the Greenback's support to higher Oil prices, firm US yields and sticky Federal Reserve (Fed) tightening expectations. They also warn that the rally looks stretched and that the next big move will need a clear trigger. The most immediate test is upcoming US core Consumer Price Index (CPI) inflation data.

Supported but capped: How the banks see the US Dollar's next move

The three banks broadly agree that the USD's downside looks limited, but that its upside is capped for now. OCBC's base case is a well-supported but range-bound USD, and it says only a core CPI print of 0.4% MoM or higher would change that. Commerzbank says the Fed's credibility, reinforced by last month's rate hike, is the anchor behind the US Dollar's recovery. ING acknowledges that the USD is overvalued against most G10 currencies and that positioning is extended, but it sees no catalyst for a reversal.

OCBC: Core CPI holds the key to a US Dollar breakout

OCBC strategists Sim Moh Siong and Christopher Wong note that markets expect the Fed to stay on hold in October before a fully priced 25 basis point (bp) hike in December. Consensus forecasts point to firmer headline inflation on higher energy costs, while core inflation is expected to stay relatively contained. That combination would trim bets on further tightening and limit the room for more USD gains.

"If core inflation moderates as expected, markets could further trim expectations for additional Fed tightening, limiting the scope for further USD gains. In our view, it would likely take a core CPI print of 0.4% m/m or higher to materially shift market pricing and strengthen the case for earlier Fed action. Until then, the USD is likely to remain supported but not break decisively higher."

Commerzbank: Fed credibility matters more than Warsh's guidance shift

Commerzbank's Thu Lan Nguyen notes that the US Dollar came under pressure over the summer, when Fed Chair Kevin Warsh deliberately stopped giving clear guidance on the path of interest rates. That move probably fuelled concerns that the US administration was influencing the US central bank. Since then, US rate expectations have moved markedly higher and the US Dollar has recovered, even though Warsh hasn't changed his stance on forward guidance. In Nguyen's view, the currency depends more on the central bank's credibility than on its communication toolkit.

"The Fed reinforced precisely this confidence with last month's rate hike. Notably, Warsh himself supported the decision. As long as markets believe that the Fed will make the right policy choice when it matters most, they appear willing to overlook the fact that the Chair is reluctant to commit to a specific future path for interest rates."

ING: A stretched rally that still lacks a reversal trigger

ING strategists Francesco Pesole, Frantisek Taborsky and Chris Turner say firmer Oil prices, following increased military activity in the Gulf, kept the USD on solid footing at the start of the week. Their short-term valuation model shows the US Dollar overvalued against every G10 currency except the British Pound (GBP), where it is at fair value. On an equally weighted basis, the USD is 1.1% overvalued against the G10. Even so, they recall that in March 2025 it took a Sell-America shock to derail an overbought USD.

"A clear macro or market catalyst is needed for a reversal, and we do not see one. Fed tightening expectations remain stickier than those for most other central banks, limiting USD downside even if oil prices retreat. At the same time, weakness across global bond markets continues to support demand for a liquid defensive currency."

The takeaway

The near-term bias for the US Dollar is still supportive, but a breakout isn't the base case. The next catalyst to watch is US core CPI. A print at or above OCBC's 0.4% MoM threshold could bring forward Fed tightening bets and push the USD out of its range. A softer reading would cap gains without necessarily triggering a reversal. Further ahead, ING flags the US midterms as a somewhat underappreciated risk for the USD. It adds that markets have long priced in a possible Republican loss of Congress, and that precautionary positioning that could weigh on the USD may not appear until late October.