Bank of America

BofA sees this week’s FOMC meeting as a key inflection point for the USD, but cautions that even a hawkish shift in the 2025 dot plot may only generate a short-lived dollar bounce. With global investors still de-risking USD exposure and the FX market pricing in long-term downside risks, Fed policy is increasingly viewed as restrictive rather than supportive.

Key Points:

Fed on Hold, 2025 Dot to Rise:

  • BofA expects the Fed to keep rates unchanged.

  • The median 2025 dot is likely to shift from two cuts to one, while the 2026 dot may reflect 75bp of cuts, consistent with a more gradual easing path.

  • Inflation forecasts are expected to be revised modestly higher.

Soft Data Undermines USD:

  • May CPI and PPI surprises eased near-term inflation fears, helping push the USD to its lowest levels since March 2022.

  • Downward revisions to NFP and rising jobless claims have highlighted labor market cracks, despite the still-low 4.2% unemployment rate.

USD Dislocation from Fed Pricing:

  • Despite limited changes in rate expectations (still pricing ~50bp in cuts for 2025), the dollar has depreciated ~3.8% over the past month.

  • FX markets are increasingly focused on structural vulnerabilities and long-term USD exposure risks among non-US real money investors.

Limited Upside from a Hawkish Surprise:

  • A 1-cut dot for 2025 would likely be interpreted as hawkish, especially post-soft CPI.

  • However, BofA expects any USD rally from such a surprise to be short-lived, as global flows continue to fade USD strength.

Conclusion:

BofA expects the June FOMC to deliver a hawkish hold, but sees limited scope for sustained USD upside. Even if the Fed signals fewer cuts in 2025, structural flow pressures and long-term valuation concerns will likely cap any dollar bounce. The broader FX market continues to treat US policy as restrictive, not supportive, reinforcing the dollar’s vulnerability to further downside.

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Source: Forex Live