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Mar 07 - 12:55 AM

BofA: Analyzing the USD's Momentum Pause and Potential Catalysts Ahead

By eFXdata  —  Mar 06 - 04:30 PM

Synopsis:

Bank of America (BofA) explores the reasons behind the recent stall in the US dollar's momentum and identifies potential triggers for its next move. Despite the US data's relative outperformance early in the year, a series of downside surprises, alongside growing global optimism and questions about US inflation data reliability, have curbed further aggressive pricing of Fed policy. Additionally, improving sentiment towards China contributes to the complex environment for the dollar. BofA points to upcoming events incuding the ECB meeting, as potential catalysts for the USD's direction.

Key Points:

  • US Data and Fed Expectations: Early 2023 saw the US dollar benefit from domestic data outperforming global counterparts. However, recent underwhelming data releases, combined with the Fed funds rate forecasts aligning with the market's expectations, have limited further dollar strength.
  • Inflation Data Questions: The reliability of recent US inflation figures, particularly the January report, has been debated due to potential seasonal and weather distortions.
  • China's Recovery Signs: Incremental policy easing and signs of economic stabilization in China have improved market sentiment, impacting the dollar's appeal.
  • Upcoming Key Events:
    • The ECB meeting's outcome and any indications of an imminent rate cut could influence the EUR/USD dynamic.
    • The US employment report for February may either reinforce the robustness of January's data or raise doubts if it underperforms, potentially becoming a decisive factor for the USD's trajectory.

Conclusion:

The immediate future of the US dollar hinges on a confluence of factors, including Fed policy expectations, global economic sentiment, and pivotal data releases. While the dollar's momentum has paused amid a reassessment of US and global economic conditions, the upcoming week's key events may provide the clarity or catalyst needed to define its next direction. BofA suggests market participants closely monitor these developments for signals on whether the dollar can regain its strength or if it will continue to face challenges.

Source:
BofA Global Research

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