Today, Ulrich Leuchtmann, Head of FX and Commodity Research at Commerzbank, is interested in the question of how FX traders would have to prepare for a scenario where central bankers’ nightmare were to become reality – if the massive rate hikes that were implemented and are yet to be realized were not sufficient to control inflation.

What would happen to EUR/USD in an inflationary nightmare scenario?

“I think anyone choosing between USD and EUR will be more likely to decide in favor of the greenback in view of these criteria. The ECB seems to have the reputation on the market of being a bit slow in the uptake. The fact that the Euro is not trading at stronger levels is likely to be at least partially due to its long hesitation. The FX market punishes those who come too late with a weak currency.

“I was asked yesterday why I nonetheless expect EUR/USD to be stronger at year-end than now anyway. The answer is simple: because we project that this horror scenario does not arise. As a result every day when this does not happen is a good day for the European single currency.”