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BofA Merrill Lynch Global Research has weighed in on the recent USD sell-off, suggesting that the markets may be prematurely pricing in an early Fed rate cut. The bank maintains that core US inflation remains too high and the labor market too tight for a sustained drop in inflation, questioning the feasibility of a soft-landing scenario.

Key Points:

1. The recent USD sell-off isn't surprising following the inflation data, but BofA suggests it might be an overreaction as it begins from an overvalued level and against a backdrop of bearish consensus.

2. Despite the market's expectations for a soft landing scenario, BofA argues this is unrealistic given the current high level of core inflation and the tight labor market in the US. Strong base effects may be misleading, but most are now behind.

3. BofA disputes market expectations for an early Fed rate cut. A monthly inflation rate of 0.2% would lead to a reacceleration of annual inflation in the coming months, making a rate cut unlikely.

4. The loose fiscal policy in the US doesn't allow the economy to cool off, further complicating the soft landing scenario.

5. BofA sees skepticism about the market's renewed enthusiasm for shorting USDJPY, considering it a popular but unsuccessful trade earlier this year.


USD/JPY selling last week on positioning and speculation of a Bank of Japan move this month:

2 different reasons the yen has been rising (hard!)

Yen rising further - speculation mounts the BOJ to forecast inflation higher, tweak policy

usdyen usdjpy 4 hour candles 17 July 2023

4 hours candles (I posted this chart earlier)