How long will the strong US dollar last? Bank of America Merrill Lynch: Short-term strength will continue, with inflation stickiness determining the trend in the second half of the year

As the market's expectations for a Fed rate cut decline, the US Dollar Index has forcefully broken through the 106 level, returning to an upward trend.

Regarding the recent trend of the US dollar, Bank of America Merrill Lynch pointed out in its latest report that the US dollar may remain strong in the short term, but faces downward pressure in the long term.

The US dollar is currently in an upward trend, mainly driven by buying outside US trading hours.

However, in the second half of the year, the US dollar may face weakening pressure, mainly due to the current overvaluation of the US dollar and market expectations of a Fed rate cut. It is worth noting that this expectation is based on the absence of new economic or political shocks.

Bank of America emphasized the importance of inflation in the report:

The stickiness of inflation has become a key factor affecting Fed decisions. If inflation remains above target, it may delay the Fed's rate cut action, thereby affecting the short-term trend of the US dollar.

Short-term Strength Continuation

Bank of America pointed out:

The market's pricing of central bank rate cuts is too forward-looking, and the stickiness of inflation in the "last mile" is a particular concern for us. We had expected the US dollar to strengthen again at the beginning of the year, but as the Fed's rate cut timing is delayed, our forecast has also been adjusted, and the pace of US dollar depreciation may be slower than previously expected.

From a technical analysis perspective, Bank of America stated that the US dollar is currently in an upward trend, but it needs to break through key resistance levels to confirm further gains, with Bloomberg's US Dollar Index at 1299 being a key target level.

Looking ahead to future trends, Bank of America believes:

Unless US inflation data remains weak in the coming months and the market fully digests the Fed's rate cut expectations for September, the US dollar may continue to be supported.

However, in the next 1-2 months, considering the moderate inflation data in May and the Fed's policy guidance, the likelihood of a significant rise in the US dollar is small.

Facing Downward Pressure in the Second Half of the Year

Bank of America's baseline forecast is that most macro factors supporting the US dollar will begin to fade in the second half of 2024. Assuming the Fed starts cutting rates and there are no new shocks, the US dollar is expected to retreat from overvalued levels in the second half of the year:

The Fed is expected to cut rates before December, which will have a negative impact on the US dollar. The current overvaluation of the US dollar is also a factor for its future weakness.

Bank of America also mentioned that a series of risk factors, including challenging inflation, elections in France and the US, and geopolitical issues, could impact the US dollar's trend:

1. The stickiness of inflation is a key factor affecting Fed decisions. If inflation remains above target, it may delay rate cut actions
2. The French and American elections will bring uncertainty to the US dollar, especially the US election may become the focus of market attention, and is expected to start affecting market sentiment from late August.
3. Market expectations are that the global economy will achieve a widespread soft landing, but if a more severe global economic hard landing occurs, it will have a positive impact on the US dollar.