Key insights
- BofA suggests the dollar's underperformance stems from low expectations of Fed rate hikes, partly attributed to perceptions of incoming Fed Chair Warsh. A strong NFP report could shift rate hike expectations and boost the dollar, with an asymmetric market reaction favoring a beat over a miss. The options market anticipates a larger-than-average move in 10-year Treasury yields post-NFP release, signaling potential volatility and a possible shift in Fed policy outlook.
Investing.com -- The U.S. dollar has failed to rally despite improving economic fundamentals, and BofA Securities strategists say the reason comes down to one word: hikes.
With April nonfarm payrolls due Friday, BofA forecast a print of 80,000, above the Bloomberg consensus median of 65,000 and comfortably above the bank’s breakeven estimate of roughly 20,000.
The unemployment rate is expected to hold at 4.3%, with a risk of rounding down to 4.2%, and labor force participation at 61.9%.
"A strong print should go a long way to opening the topside of the expected Fed path distribution and bring the USD higher with it," FX Strategist Alex Cohen said.
But markets have been reluctant to price that scenario in. Fed funds futures currently reflect only 5-6 basis points of rate hikes over the next 12 months, with policy expectations dispersed across tightening at roughly 20% likelihood, on-hold at 50-55%, and easing at 25-30%.
BofA attributes the dollar’s muted response to the perceived stance of incoming Fed Chair Warsh.
"The market has been given sufficient reason to believe that the bar for rate hikes is high under incoming Fed Chair Warsh," Cohen said.
The brokerage identified this as "one key reason why the USD has struggled to rally against a backdrop of improving outright and relative macro fundamentals, and higher oil prices."
The contrast with other G10 central banks is sharp. Since the war began, pricing of potential hikes has shifted materially across the bloc, the Reserve Bank of Australia delivered a 25 basis point hike on May 5, while Fed pricing has mostly stayed flat.
On rates, BofA sees an asymmetric reaction function. A payrolls beat is expected to move markets more than a miss of equivalent size, driven by a widening of the potential rate hike distribution.
The options market is pricing an implied move of 6-6.5 basis points in 10-year Treasuries around the release, above the historical average of 4.9-5.4 basis points.
Since 2023, a +100,000 NFP beat versus Bloomberg consensus has produced a roughly +7 basis point move in 2-year rates; since 2025, that sensitivity has fallen to +4 basis points on a comparable miss.
An unemployment rate print of 4.2% or below would be outside the full range of projections in the Fed’s March Summary of Economic Projections, which BofA said would likely add further hike risk premium to rates.
On the downside, BofA said a soft report "should weigh on the USD," but expected moves to remain contained. Over the past year, the net move in EUR/USD in the hours following jobs reports has rarely exceeded +/-0.5%.
March payrolls printed at 178,000 against a consensus of 65,000, with the unemployment rate dropping to 4.3% from 4.4%, according to data in the BofA report. February saw a miss at -92,000 versus a 55,000 forecast.