The US dollar has failed to strengthen despite improving economic data, and BofA Securities strategists explain this with one word: rate hikes.
April nonfarm payrolls data is due on Friday. BofA forecasts a figure of 80,000, above the Bloomberg median consensus of 65,000 and well above the bank's breakeven estimate of around 20,000.
The unemployment rate is expected to remain at 4.3%, with a rounding risk of 4.2%, and labor force participation at 61.9%.
"A strong reading should significantly open up the upper range of the expected distribution of the Fed's path and lift the dollar," said currency strategist Alex Cohen.
However, markets are reluctant to price in this scenario. Federal funds rate futures currently reflect only 5-6 basis points of rate hikes over the next 12 months, with policy expectations spread as follows: a tightening probability of about 20%, a hold probability of 50-55%, and an easing probability of 25-30%.
BofA attributes the dollar's muted response to the perceived stance of incoming Fed Chairman Warsh.
"The market has ample reason to believe that the bar for rate hikes is high under incoming Fed Chairman Warsh," Cohen noted.
The brokerage firm cited this as "one of the key reasons why the dollar has failed to strengthen amid improving absolute and relative macroeconomic indicators and rising oil prices."
The contrast with other G10 central banks is striking. Since the start of the war, expectations for a potential rate hike have shifted significantly across the bloc: the Reserve Bank of Australia hiked by 25 basis points on May 5, while expectations for the Federal Reserve remained largely unchanged.
For rates, BofA sees an asymmetric reaction function. A jobs outperformance is expected to have a greater impact on markets than a comparable disappointment, due to the widening distribution of rate hike probabilities.
The options market is pricing in an implied move of 6-6.5 basis points in 10-year US Treasuries at the release date, above the historical average of 4.9-5.4 basis points.
Since 2023, a +100,000 NFP outperformance relative to the Bloomberg consensus has resulted in a roughly +7 basis point move in 2-year rates; since 2025, this sensitivity has decreased to +4 basis points for a comparable disappointment. An unemployment rate of 4.2% or lower would be outside the full range of the Fed's March "Summary of Economic Projections," which BofA estimates would likely add a premium to the risk of a rate hike.
In a downside scenario, BofA noted that a weak report "should weigh on the dollar," but expects moves to remain limited. Over the past year, the net change in EUR/USD in the hours following the employment data release has rarely exceeded +/- 0.5%.
March's payrolls came in at 178,000, compared to a consensus of 65,000, and the unemployment rate fell to 4.3% from 4.4%, according to BofA's report. February's figure was disappointing: -92,000, compared to a forecast of 55,000.