Synopsis:

Bank of America revises its G10 FX outlook as continuous high U.S. inflation readings contribute to market unease and lead to adjustments in monetary policy expectations. While longer-term forecasts still predict a softer dollar, near-term projections now anticipate a relatively stronger USD.

Key Points:

• Persistent U.S. Inflation: The start of the year has seen three consecutive higher-than-expected U.S. inflation data points, causing discomfort in financial markets and prompting policymakers to reconsider their strategies. This persistent inflation is challenging initial expectations of easing monetary policies.

• Impact on Federal Reserve Policy: The unexpected inflation data has led to a shift in market expectations regarding the Federal Reserve's actions, with anticipated near-term rate cuts being pared back. This adjustment reflects growing concerns about sustained inflationary pressures.

• Dollar Strength and FX Outlook Revisions: In response to the ongoing economic conditions and the shift in policy expectations, BofA has updated its G10 FX outlook. Initially expecting a broadly softer dollar towards the year-end, the bank now sees potential for a stronger dollar in the near term, contingent on continued inflation pressures.

• Long-Term Outlook: Despite the revisions for the near term, BofA still projects a softer dollar by the end of the year. However, this outlook is tempered by caution, as persistent inflation could extend the dollar's strength further into the year than previously expected.

Conclusion:

Bank of America's revised G10 FX outlook reflects a complex interplay between unexpected inflation persistence, adjustments in monetary policy expectations, and broader economic indicators. The bank cautions that if inflation remains high, the risk of a stronger dollar could increase, influencing global currency markets.