Bank of America Forecasts Sideways Trading for US Dollar Through Year-End

The U.S. dollar is expected to trade in a sideways range through the end of the year, as the market has already priced in significant future tightening from the Federal Reserve, according to a recent Bank of America report. This outlook persists even as market pricing indicates a roughly 85% probability of a rate hike at the upcoming September Federal Open Market Committee (FOMC) meeting.

High Bar for Hawkish Surprises

Bank of America analysts noted in a September 8 report that the bar for the Fed to exceed market expectations is now considerably high. With more than three rate hikes already priced into the market, it would be difficult for the central bank to deliver a hawkish surprise that could fuel a significant new rally for the dollar.

The currency has also faced headwinds from a broader repricing of interest rate expectations and yield curves across other G10 central banks, diminishing the dollar's relative yield advantage. The dollar's recent inability to rally despite a sharp increase in oil, gas, and other energy prices—a traditional catalyst for appreciation—further underscores its weakened momentum.

Weak Sentiment Amid Mixed Signals

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Dollar sentiment has been soft since the July FOMC press conference, which BofA suggests raised credibility concerns over the Fed's plan to tackle persistent inflation. Since then, investors have navigated a series of mixed signals from policymakers and economic data.

Key developments contributing to market uncertainty include:

• An attempted course correction in messaging from Fed Chair Warsh at the Jackson Hole symposium.
• A strong August labor market report.
• Dovish public comments from Fed officials Williams and Waller.
• A U.S. Treasury buyback initiative aimed at suppressing yields.

Based on these factors, Bank of America's report, titled "G10 FX back-to-school: dollar unloaded," concluded that the dollar's trajectory is likely to be flat into year-end, with the notable exception of its movements against the Japanese yen.