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Bank of America's 2024 forecasts confirm it is more bearish on the U.S. Dollar than the consensus, with analysts saying Federal Reserve interest rate cuts "matter more for the market" than cuts at other central banks.

Bank of America (BofA) expects the Euro to Dollar exchange rate (EURUSD) to clear the 1.10 level over the coming months and rise towards its fair value. However, analysts caution this does not necessarily mean "the Euro will be supported on its own merits."

Thanos Vamvakidis, Head of G10 FX Strategy at Bank of America, told a media briefing that in 2023, he and his colleagues were more bullish than the consensus on the Dollar, but the opposite is true for 2024.

The coming USD weakness will be premised on expectations that U.S. economic growth will "land" and create a smaller outperformance gap for the U.S. versus others in a "U.S. recoupling".

BofA's economists expect three Federal Reserve rate cuts starting in June, which is similar to what is expected from the ECB.

But Vamvakidis says, "Fed cuts matter more for the market", and the downside impact on the U.S. Dollar will likely be exaggerated relative to other currencies whose central banks are cutting.

Fed rate cuts should support risk sentiment, and 'risk on' is consistent with a weaker Dollar.

Above: Market expectations for future Fed interest rate levels have fallen during November in a move correlated with a weaker USD. Image courtesy of Goldman Sachs.

Meanwhile, Bank of America's models show the dollar is still overvalued, which will unwind, leading the Euro-Dollar exchange rate to 1.15 in 2024.

Vamvakidis says there is a risk the U.S. economy will perform better than is currently expected and the Fed cuts later than June.

Another risk is inflation everywhere is "sticky on the way down".

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"Labour markets are stretched everywhere", says Vamvakidis, adding wages are higher than the levels required to get inflation down to 2%.

He says central banks won't rush to cut rates. There is also a risk of a 'harder landing', i.e. higher interest rates for longer, could cause "something to break" in the financial system.

However, the impact on FX of such a scenario is not entirely obvious: does it boost the Dollar via risk-off, or does it entice the U.S. Fed into rate cuts which is negative for the USD?

The U.S. election is another unknown for 2024 and could trigger volatility.

Vamvakidis says the "Euro won't be supported on its own merits" as the Eurozone economy is set to remain relatively weak.

Bank of America's Euro-Dollar forecast is thus a case of the U.S. economy slowing down as opposed to the Eurozone economy accelerating.

Fiscal consolidation is seen as a longer-term risk for the Euro as economies are brought back into the European Union's fiscal rules framework after the pandemic hiatus, but Bank of America's analysts see this as more of an issue for 2025.