EUR/USD showed an unusually mean-reverting development over the first half of the year – Commerzbank

The first half of the year is over. Economists at Commerzbank review the development of EUR/USD since the start of the year.

If inflation eases again, it will no longer be so super clear how central banks should act

EUR/USD showed an unusually mean-reverting development over the first half of the year. In other words: in case of high prices the tendency to falling prices dominated, in case of low prices the tendency to rising prices. To prevent anyone from turning this into a trading rule to be used going forward let me warn you: the fact that EUR/USD behaved like that during the first half does not mean that the pair will follow a similar pattern over the coming 6 months.

If inflation eases again, it will no longer be so super clear how central banks should act. Should they lower interest rates or maintain them for some time? If one lowers interest rates, how quickly should that happen? Differences might arise that are much more permanent and might provide longer-lasting momentum for EUR/USD. At that point, mean-reverting will be over.

For those who hedge medium-term EUR/USD risks, the first half of the year was not a time when hedging with the help of options paid off particularly. You pay an option premium that is based on the relatively high volatility rather than the particularly small range. My message is: do not let this experience give you the impression that this will always be the case. The fundamental causes of this pattern should disappear.