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BofA: Assessing Oil Price Risks to USD Outlook

By eFXdata  —  Apr 10 - 04:30 PM

Synopsis:

Bank of America (BofA) examines how higher oil prices might pose an upside risk to the US dollar's (USD) forecast, diverging from their medium-term bearish stance. Despite anticipating a weaker USD towards year-end, driven by expected Federal Reserve rate cuts and disinflation, recent developments in oil prices could complicate this outlook. BofA's analysis reflects on how inflation dynamics, influenced by oil prices, have previously played a significant role in USD trends, suggesting potential implications for future currency movements.

Key Points:

  • USD Outlook: BofA maintains a medium-term bearish outlook on the USD, with an end-year forecast of EUR-USD at 1.15. However, near-term dynamics have kept the EUR-USD lower than expected.
  • Impact of Oil Prices: Historical analysis indicates that rising oil prices have led to USD appreciation through inflationary pressures, prompting the Fed to shift from zero interest rates and quantitative easing to higher rates and quantitative tightening.
  • Disinflation and USD Movement: Conversely, disinflationary trends, driven by factors like improved labor supply and the reversal of oil shocks, have contributed to USD depreciation.
  • Oil Price Trends: The recent uptick in oil prices, following a period where they contributed to disinflation, suggests a potentially complex interplay with the USD's trajectory.

Conclusion:

Higher oil prices could introduce an upside risk to the USD, potentially complicating BofA's bearish forecast. The interrelationship between oil prices, inflation, and Fed policy decisions underscores the complex dynamics at play in determining the USD's direction. While disinflation has been a key factor driving expectations of a weaker USD, renewed inflationary pressures from rising oil prices may influence the Fed's monetary stance and, by extension, the USD's performance. BofA highlights the importance of monitoring oil price movements as a critical factor in assessing risks to the USD outlook.

Source:
BofA Global Research

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