BofA: USD Off To A Hot Start

Bank of America note that “the USD has rallied against all G10 currencies in early ‘24.”

• They see several reasons for this, including: “the exuberant "pricing to perfection" of a soft landing scenario and the possibility that any Fed cuts priced for a harder landing scenario are not USD negative; a mixed reading of recent US labor and inflation data; recent Fed communication striking a more balanced tone than the December FOMC; the fact that other central banks are similarly (albeit more modestly) being priced for faster/deeper easing in 2024; and ongoing geopolitical concerns.”
• “While we see the USD depreciating broadly this year, it could still take some time, and our forecasts call for greater moves in H2. Current Fed pricing is excessive, but a normalized inflation environment and eventual rates cuts should still allow for greater FX valuation adjustments to finally occur, even as most other central banks are also cutting.”
• “But until we get even more signs that inflation is comfortably pointing towards central bank targets, the timing and pace of USD depreciation can remain less certain.”