Synopsis:

BofA sees near-term USD strength driven by trade policy uncertainty, sticky inflation concerns, and Fed policy repricing. However, they expect USD depreciation in H2 as clarity on these factors emerges.

Key Points:

1. USD Drivers:

   • Tariff uncertainty is keeping FX volatility elevated and supporting the USD.
   • US labor market remains resilient, reducing Fed rate cut expectations.
   • Inflation readings have improved, but concerns about sticky inflation and rising expectations persist.

2. Fed Policy Shift:

   • BofA economists now expect no further rate cuts in 2025.
   • Market pricing has adjusted to between one and two 25bp cuts this year.

3. FX Positioning:

   • Net-USD long positions have extended further and now appear stretched.

4. EUR/USD Forecasts:

   • Q1: 1.03
   • Q2: 1.05
   • Q4: 1.10 (gradual USD depreciation expected).

Conclusion:

BofA expects USD strength to persist in H1 but sees gradual USD depreciation in H2, leading to EUR/USD moving toward 1.10 by year-end.