Bank of America Global Research discusses its USD outlook for next year and its related EUR/USD and USD/JPY targets over next year time-horizon.
"For now, the forces that have supported the USD this year remain valid, despite the recent correction lower. The US economy is still overheating, with high core inflation and a stretched labor market, despite mixed recent data. The Fed remains the most hawkish central bank in the G10, with the highest policy rate, committed to fight inflation at almost any cost and proving markets wrong that lower equities, fear of recession or financial stability would force a pivot,"BofA notes.
"In our baseline, the USD remains strong early next year and starts a more sustained downward path after the Fed pauses. We forecast EURUSD at parity and USDJPY at 146 by 1Q23. . However, in our baseline the USD gradually weakens starting in Q2, to 1.10 for EURUSD and to 135 for USD/JPY by end-2023, with our EURUSD forecast above the consensus,"BofA adds.