Dollar Struggles to Rally Despite Strong US Data as Fed Hike Expectations Remain Limited

The U.S. dollar has continued to underperform even as economic data points to improving fundamentals, and BofA Securities believes the market’s hesitation is tied to expectations surrounding future Federal Reserve rate hikes. According to BofA strategist Alex Cohen, investors remain unconvinced that the Fed will aggressively tighten monetary policy under incoming Fed Chair Kevin Warsh, limiting upside momentum for the USD.

Ahead of the highly anticipated April nonfarm payrolls report, BofA projected job growth of 80,000, exceeding the Bloomberg consensus estimate of 65,000. The bank also expects the unemployment rate to remain at 4.3%, with a possibility of easing to 4.2%, while labor force participation is forecast to stay at 61.9%.

BofA noted that a stronger-than-expected payrolls report could significantly impact market expectations for Federal Reserve policy. Cohen said a solid labor market print would likely increase the probability of future interest rate hikes and provide support for the U.S. dollar. However, markets currently price in only 5 to 6 basis points of tightening over the next 12 months, reflecting limited confidence in a hawkish Fed outlook.

The bank highlighted that investors believe the threshold for additional rate hikes remains high under Warsh’s expected leadership. This perception has prevented the dollar from rallying despite stronger macroeconomic indicators and rising oil prices.

Meanwhile, other major central banks have taken a more aggressive approach. The Reserve Bank of Australia recently implemented a 25-basis-point rate hike, while U.S. rate expectations have remained relatively stable.

BofA also pointed to increased volatility expectations in Treasury markets surrounding the jobs report. Options markets are currently pricing larger-than-average swings in 10-year Treasury yields following the data release.

The EUR/USD pair has remained relatively stable despite recent economic surprises. BofA added that weaker payroll numbers would likely pressure the dollar, although the bank expects downside moves to remain limited based on historical post-payroll trading patterns.