BofAML says that FOMC risk is skewed towards a bullish USD

And could trigger a move in EUR/USD towards 1.20

Bank of America Merrill Lynch discusses the USD outlook ahead of the FOMC meeting and flags upside risk for the currency.

"Event risk at this week's March FOMC meeting is skewed USD bullish, in our view. Although the market is fully pricing in a 25 bps hike, the dollar could be pushed higher as a result of revisions to the Fed's projections, in particular a potential increase in 2020 and longer-run dot projections. A rise in the dot plot impacts the dollar via the interest-rate expectations channel, which has been an important driver of FX returns this year", BofAML argues.

They expect the dot plots to show a higher path of rates, which will include a slight bump up in the longer-run forecast. Their expectations for 2018 remains at 3 hikes, but 2019 will see a shift from 2 to 3 hikes.

They add that "if the rates market either price in four hikes in 2018 or price the Fed consistent with the 2019 median dot, we think EUR/USD would test the 1.20 level fairly quickly".