BofA discusses the USD's response to the recent re-pricing of the Federal Reserve's policy path, highlighting the market's fluctuating expectations for a March rate cut and adjustments in the total cuts anticipated for 2024. Last week's developments, including the Fed's revised communication, strong US data, and renewed concerns over regional banks and commercial real estate, significantly influenced Fed cut expectations. Despite these shifts, the anticipated trough of Fed pricing remained relatively stable, impacting the USD's near-term trajectory.
Fed Cut Expectations: Market expectations for a March rate cut saw significant volatility last week, initially at ~50%, rising to ~65% due to banking sector concerns, and then dropping to ~15% after the FOMC meeting and employment report. Total rate cuts for 2024 have been adjusted to 123 basis points from 140.
USD Outlook: The uncertainty surrounding the Fed's next moves, particularly the pushback against a March cut, has prompted a re-evaluation of the USD's position relative to other G10 currencies. The consensus that the Fed would lead G10 central banks in cutting rates is now being questioned.
Medium to Long-Term Projections: BofA maintains that the Fed's hesitancy to cut rates in March is more indicative of a desire for additional data confirmation rather than a fundamental shift in policy trajectory. This approach suggests a short-term upside risk for the USD but supports BofA's baseline forecast of eventual dollar depreciation, pending clearer data signals.
The USD's reaction to evolving Fed policy expectations underscores the currency's sensitivity to central bank signaling and macroeconomic data. While recent developments have introduced near-term upside risks for the USD, BofA anticipates a downward trajectory once the Fed initiates its rate-cutting cycle, contingent on further economic indicators. Investors are advised to closely monitor upcoming data releases and Fed communications for clearer directional cues on the USD.