Synopsis:

BofA warns that USD strength remains the broad consensus, but long USD positioning is crowded and priced to perfection. While the US economic outlook is strong, and the Fed is likely done cutting rates, the risk lies in an overextended bullish consensus and potential surprises from trade policy.

Key Points:

Why the USD Remains Strong

• US growth remains favorable compared to G10 peers.
• Labor market remains healthy, supporting economic resilience.
• Inflation remains sticky, as evidenced by the latest CPI upside surprise.
• Fed rate cut expectations have been pared back significantly, with some speculation that cuts may stop altogether.

Why BofA Warns of Overcrowding

• USD is "priced to perfection", meaning all positives are already factored in.
• Long USD remains the most crowded trade for the past two months.
• Any negative surprises (e.g., from trade wars, softer data, or policy shifts) could trigger a sharp unwind.

Trade War Risks Add Uncertainty

• Impending tariff announcements remain a wildcard.
• Potential US-EU trade tensions could disrupt market sentiment.
• Market pricing may not fully reflect second-round effects of trade disruptions.

Conclusion:

While BofA acknowledges that fundamentals still favor USD strength, they caution that long USD positioning is crowded, and the bullish narrative is at risk of becoming stale. Any shifts in Fed expectations, weaker data, or unexpected trade policy developments could trigger a sharp USD correction.