Bank of America Predicts Modest US Dollar Downside
Federal Reserve Initiates Rate-Cutting Cycle
In a recent note dated September 26, analysts at Bank of America Securities have indicated their expectation of modest US dollar downside going into 2025. This prediction comes on the heels of the Federal Reserve’s decision to kick off its rate-cutting cycle with a 50 basis points cut, surprising the markets to some extent.
Core FX Dynamics Unchanged in G10
Despite the Fed’s move, the core FX dynamics in G10 currencies are expected to remain largely unchanged. The US dollar is viewed as moderately overvalued by the bank, but the rate-cutting cycle initiated by the Federal Reserve is anticipated to help alleviate this overvaluation over the medium term. This outlook also includes a projection for a rising EUR/USD.
EUR/USD Forecast
Bank of America Securities maintains their forecast for EUR/USD, with expectations of the currency pair building on recent gains. Their forecast profile includes an end-2024 target of 1.12 and an end-2025 target of 1.17.
Continued USD Downside Expected
The bank believes that USD downside is likely to persist, supported by disinflationary trends and a softening labor market that would prompt the Federal Reserve to maintain a modestly accelerated rate-cutting pace. Bank of America Securities anticipates another 50 basis points cut at the upcoming November meeting, followed by a 25 basis points reduction in December.
Current Market Status
As of 10:00 ET (14:00 GMT), EUR/USD was trading 0.1% higher at 1.1142, showing an approximate 1% increase year-to-date.
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Analysis:
The Federal Reserve’s decision to embark on a rate-cutting cycle has significant implications for the US dollar and the broader foreign exchange market. Bank of America Securities’ forecast of modest US dollar downside, driven by the Fed’s actions, sheds light on the potential trajectory of key currency pairs like EUR/USD.
For the average individual, understanding these forecasts can offer insights into how the value of their currency may fluctuate in the coming years. A weaker US dollar could impact various aspects of the economy, from import prices to travel costs, influencing consumer spending and inflation levels.
Therefore, staying informed about these forecasts and their potential effects on personal finances can empower individuals to make more informed decisions, whether it involves currency exchange for travel or investment choices in a global market influenced by shifting currency valuations.