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Jun 11 - 10:55 AM

BofA: What to Expect from the Dollar and Dots at June FOMC on Wed?

By eFXdata  —  Jun 11 - 09:55 AM

Synopsis:

Bank of America (BofA) anticipates the Federal Reserve will signal a prolonged pause at the June FOMC meeting, with a high bar for hikes or multiple cuts. The median dot plot is expected to indicate two cuts this year, beginning in September, which will have significant implications for the US dollar (USD).

Key Points:

  1. Prolonged Pause Expectation:

    • BofA expects the Fed to signal a prolonged pause, with the bar set high for either hikes or several cuts.
    • The median dot plot is anticipated to show two cuts this year, starting in September.
  2. Dot Plot Implications for FX Markets:

    • The primary question for FX markets is whether the 2024 dot will reflect one cut or two from the median member.
    • BofA expects the median to indicate two cuts, though it acknowledges it could be a close call.
    • The recent moderation in growth and inflation weighed on the dollar in May, but the strong employment report on Friday reversed this trend.
  3. Market Pricing and Potential Outcomes:

    • Market pricing currently reflects about 1.5 cuts through December, down from closer to two cuts before the Non-Farm Payrolls (NFP) report.
    • If the median member envisions two cuts, this will likely be seen as dovish, suggesting that labor market resilience won't hinder cuts this year.
    • Conversely, signaling only one cut would be interpreted as hawkish, especially given the recent moderation in growth data and receding inflation risks.
  4. FOMC Press Conference Impact:

    • FOMC press conferences during this hold-period have generally been seen as dovish, with Powell aiming to avoid overly restrictive policy.
    • The USD has tended to depreciate during Powell's Q&A sessions.
    • Even if the 2024 dot reflects one cut, Powell may downplay the significance of the Summary of Economic Projections (SEP) in the press conference.

Conclusion:

BofA expects the June FOMC meeting to signal a prolonged pause with a high bar for hikes or multiple cuts. The median dot plot is likely to indicate two cuts this year, starting in September. The FX market reaction will hinge on whether the 2024 dot reflects one cut or two. A signal of two cuts would be viewed as dovish, potentially weighing on the USD, while one cut would be seen as hawkish. Overall, risks are skewed towards moderate USD downside.

Source:
BofA Global Research

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