Bank of America Global Research notes that the FX landscape is evolving with fundamentals are back in the driver seat.
"Risk appetite has been the dominant factor in FX markets since last March, when official sector policy began aggressively supporting markets, serving to collapse FX risk premium as the US dollar declined back to presently-neutral valuation levels. But our analysis indicates that the landscape has finally broadened to include traditional fundamental factors including relative interest rates. Within a backdrop of US growth at 6% and US 10-year yields at 1.75% this year, per revised forecasts, we think that this matters," BofA notes.
"Factor shifts lend support to our thesis that improving US fundamentals will provide a tailwind to the US dollar, increasing the risk of a rally as the year unfolds," BofA adds.