The US dollar has failed to rise despite improved economic fundamentals, and Bank of America Securities strategists say the reason boils down to one word: interest rate hikes.
With the release of the April non-farm payrolls data on Friday, Bank of America predicted a reading of 80,000 jobs, a figure higher than the Bloomberg consensus average of 65,000 and comfortably above the bank's breakeven estimate of around 20,000 jobs.
The unemployment rate is expected to hold steady at 4.3%, with a possible drop to 4.2%, while the labor force participation rate is expected to reach 61.9%.
Foreign exchange strategist Alex Cohen said: “A strong reading should contribute significantly to opening up the upper end of the Fed’s projected path and lift the value of the US dollar.”
However, markets have been cautious in pricing in this scenario. Fed futures contracts currently reflect only 5-6 basis points of interest rate hikes over the next twelve months, with monetary policy expectations distributed between a roughly 20% probability of tightening, a 50-55% probability of holding steady, and a 25-30% probability of easing.
Bank of America attributes the dollar's muted response to the perceived stance of the incoming Federal Reserve Chairman, Warsh.
Cohen said: Markets have been given ample reason to believe that the threshold for raising interest rates is high under Warsh's upcoming presidency of the Fed.
The bank identified this as one of the main reasons why the US dollar struggled to rise against the backdrop of improved absolute and relative economic fundamentals and rising oil prices.
The contrast with other central banks in the G10 is clear. Since the outbreak of the war, the pricing of potential interest rate hikes has shifted significantly across the group, with the Reserve Bank of Australia raising interest rates by 25 basis points on 05/05, while the Fed's pricing has remained largely unchanged.
Regarding interest rates, Bank of America sees an asymmetric reaction. A better-than-expected jobs report is expected to move markets more than a similarly lower one, driven by the widening probability of a rate hike.
The options market is pricing in an implied move of between 6.00 and 6.50 basis points in 10-year Treasury bonds around the release of the data, which is higher than the historical average of between 4.90 and 5.40 basis points.
Since 2023, non-farm payrolls data exceeding the Bloomberg consensus of 100,000 jobs have resulted in a move of about 7.00 basis points in two-year bond prices; since 2025, this sensitivity has decreased to 4.00 basis points when a similar decline occurs.
An unemployment rate reading of 4.2% or lower would be outside the full range of forecasts in the Fed's March Summary of Economic Projections, which Bank of America said would likely add a premium for interest rate hikes.
On the downside, Bank of America said the weak report should weigh on the US dollar, but predicted that price movements would remain limited. Over the past year, the net move in the EUR/USD pair in the hours following jobs reports has rarely exceeded +/-0.5%.
According to data in the Bank of America report, March's job data showed 178,000 jobs added compared to expectations of 65,000, with the unemployment rate falling to 4.3% from 4.4%, while February's data came in below expectations by -92,000 jobs compared to expectations of 55,000.
