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Mar 04 - 12:55 PM

BofA: USD's Bulls versus Bears

By eFXdata  —  Mar 04 - 10:45 AM

Synopsis:

Bank of America (BofA) provides an insightful analysis on the current sentiment surrounding the US Dollar (USD), presenting both bullish and bearish viewpoints. As the FX market grapples with low conviction and searches for new catalysts, BofA explores the factors that could sway the USD's trajectory in the near term.

Bearish Case for the USD:

  • Market Consensus: The prevailing view anticipates the USD to weaken throughout the year, underpinned by diminishing factors that have bolstered its strength in recent times.
  • Inflation Trends: Despite unexpected strong data, inflation indicators like core PCE are showing signs of softening. This trend, coupled with anticipated adjustments for January distortions, suggests a more manageable inflationary landscape ahead.
  • Fed Policy and Real-Rate Convergence: The Federal Reserve's current restrictive stance is seen as overly tight given the expected inflationary environment. An impending convergence of real interest rates is likely to exert downward pressure on the USD.

Bullish Case for the USD:

  • US Exceptionalism: Proponents of a stronger USD highlight the narrative of relative US growth outperformance, attracting capital inflows.
  • Core Inflation Stickiness: Persistent inflation in core services may prevent the Fed from pivoting prematurely, aligning with its communicated stance.
  • External Risks: Factors such as the US electoral cycle, geopolitical tensions, and risks of a hard economic landing are seen as potential USD tailwinds. Conversely, concerns around commercial real estate and regional banking issues, while potentially USD negative, have not yet demonstrated widespread impact.

BofA's Conclusion:

  • Inflation vs. Growth: The debate between inflationary pressures and growth prospects continues, with BofA suggesting that inflation will be a critical factor for Fed policy decisions. However, interpretations vary among market participants.
  • Forecast: BofA maintains a bearish outlook on the USD for the year, aligning with its economists' projections of a soft landing for the US economy. Nonetheless, investors are advised to exercise patience as the situation unfolds.
Source:
BofA Global Research

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