BofA now expects Fed to hike interest rates three times this year

That shows how quickly the perception in markets can change. Just six weeks ago, BofA changed their call from rate cuts to expecting the Fed to stand pat for the rest of the year. At the time, they argued that:”The data simply don’t warrant cuts this year. Core inflation is too high, and moving up. The solid April jobs report was the last straw, especially given hawkish Fedspeak.”And now with the latest shift in expectations from Fed chair Warsh as well as US-Iran developments, the firm is expecting three rate hikes to follow for the rest of the year.They now forecast the Fed to move by 25 bps each in September, October, and December. That’s a very hawkish tilt with markets only pricing in ~41 bps of rate hikes at the moment.At the same time, BofA continues to remain bullish on the dollar as they continue to argue for a lower EUR/USD heading into the summer:”We expect relative data to continue weighing on EUR/USD over the summer and see room for the Fed to be repriced higher. EUR, in our view, has not materially benefited from the ECB hiking narrative, although the eventual FX impact will depend on inflation persistence and the Fed’s stance. Belly real yield differentials remain particularly informative. In addition, while EUR/USD sentiment and positioning have moderated meaningfully, neither has reached the extremes observed in 2022 and 2024.”



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