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Sep 19 - 10:55 AM

BofA: Tactically Fading a Fed-Induced USD Rally this Week May Be Wise Given Upcoming Risks

By eFXdata  —  Sep 19 - 09:49 AM

Bank of America (BofA) notes that the upcoming FOMC meeting will be crucial for USD trends, mainly due to the release of the Summary of Economic Projections (SEP) or "the dots". While upward revisions to these projections could provide short-term USD strength, BofA sees potential downside risks for the USD beyond this week's meeting.

Key Points:

  • Fed's SEP: BofA expects upward revisions to the Federal Reserve's dot-plot, which, if realized, would likely support the USD in the near term.
  • Final 2023 Hike: The probability of a final rate hike in 2023 could push above the current 55%, supporting the USD.
  • 2024 Projections: An upward revision for the 2024 dot could further delay pricing out rate cuts, also being USD supportive.


For Forex Traders:

  • USD Short-Term Boost: Look for a potential USD rally if the FOMC's SEP shows hawkish trends.
  • Tactical Fading: BofA suggests that traders might want to tactically fade any short-term USD rally because of potential downside risks.

For Investors:

  • Downside Risks: Risks such as the UAW strike and a possible government shutdown, although low impact, could exert modest negative pressure on USD.
  • Global Factors: Pessimism regarding China’s stimulus is already priced into FX markets, but any change could also affect USD trends.

For Economists:

  • Growth Differentials: These have been key in driving the USD recently. Any domestic or global disruptions could have a significant impact on USD stability.

The Takeaway:

While BofA sees the potential for a short-term USD rally based on expected hawkish revisions to the Fed’s SEP, it also identifies several downside risks. These include domestic events like the UAW strike and potential government shutdown, as well as international factors like China's economic outlook. Therefore, tactically fading a Fed-induced USD rally might be a prudent approach.

BofA Global Research


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