Fed’s Rate-Cutting Cycle Suggests Weaker Dollar – BoA Securities

The Federal Reserve has initiated its rate-cutting cycle, prompting Bank of America Securities to anticipate a modest decline in the US dollar as we approach 2025.

Despite the Fed’s unexpected 50 basis points cut last week, analysts from Bank of America Securities believe that the fundamental dynamics of major currency pairs remain largely stable, with the EUR/USD expected to continue its upward trajectory, according to a note released on September 26.

The bank considers the US dollar to be moderately overvalued, but expects that the ongoing rate cuts by the Fed will help to mitigate this overvaluation in the medium term, particularly leading to a stronger EUR/USD.

Bank of America forecasts that EUR/USD will build on its recent gains, maintaining its projections of 1.12 by the end of 2024 and 1.17 by the end of 2025.

The bank indicates that further downside for the dollar is probable, as disinflationary trends and a cooling labor market will likely support the Fed’s increasingly rapid pace of rate reductions.

Looking ahead, Bank of America predicts an additional 50 basis points cut in the upcoming November meeting, followed by a 25 basis points reduction in December.

As of 10:00 ET (14:00 GMT), the EUR/USD was trading 0.1% higher at 1.1142, marking an increase of approximately 1% year-to-date.