Bank of America: While waiting for the dollar to turn, US inflation will trigger a more aggressive response from the Fed, EUR / USD forecast end of 2021 1.1500

Bank of America expects the dollar to remain on the defensive in the near term, with traders still looking to sell the currency for the sake of momentum.

In this environment, the euro to dollar exchange rate (EUR / USD) could post further gains at 5 month highs.

The bank still expects a rally in the dollar in the medium term and a decline at the end of the year to 1.1500 as the Fed signals a tightening of its policy.

Euro-dollar rate may show 5-month highs

At this point, Bank of America expects the dollar to be supported only by inflation expectations and short-term oversold conditions.

Against this backdrop, the bank expects the dollar to lose further ground in the near term with the possibility that the euro / dollar (EUR / USD) exchange rate will register further limited gains.

“Signals of bearish momentum from the USD against the backdrop of the summer seasons and persistent positioning may well conspire to push the USD to new lows before a rally emerges, in our opinion.â€

Fed Shift will trigger dollar recovery in the medium term

The BoA still expects the dollar to strengthen over the next few months as speculation about a more restrictive Fed policy intensifies. The bank expects the Fed to signal a decrease in bond buying and start slowing buying in the first quarter of 2022.

“That said, we are signaling that monetary policy expectations could move decisively in favor of the US dollar in the coming months.”

So it’s important to note that the BoA expects the dollar to strengthen before the Fed actually slows the bond buying rate.

The bank expects the timing of policy changes to be determined by developments in the labor market, but the magnitude of the change to be determined more by trends in inflation.

A sharp rise in inflation would increase the threat of a more aggressive policy response from the Fed; “Therefore, inflation is what could really surprise the markets, leading to more rapid tightening once the Fed kicks in.

Bank of America notes the importance of the ECB’s inflation review which could go both ways for the euro, with Fed policy likely to be crucial.

Nordea expects the Fed to slow down asset purchases earlier than the markets expected. In part, the bank expects fears that asset purchases will contribute to inequalities, especially in the housing sector, to increase the pressure to reduce purchases.

“We still expect the Fed to cut sooner than most people imagine, not least because the Fed’s new awakening will likely play a role in defining the next cutback decision.”

Nordea also expects a further surge in inflation which will add to the pressure; “The May Inflation Report (due June 10) looks like another shock with core inflation above 4%, if we are correct that used car prices will rise 50% in the month. during the year. “

In contrast, Goldman Sachs expects dollar losses to continue; “We expect the dollar’s trend depreciation to continue, due to the currency’s high valuation, a long period of low nominal and real short-term interest rates, and increasingly competitive yields. of the overseas asset market. “