Overview
Despite a backdrop of stronger U.S. macro data and rising oil prices, the U.S. dollar has not rallied as some investors might expect. Strategists at BofA Securities point to one main factor behind the dollar’s muted performance - the probability of additional policy rate hikes. The bank’s analysis centers on how markets are pricing future Fed moves and how that pricing limits the currency’s upside.
Jobs expectations and the potential market response
With April nonfarm payrolls scheduled for release on Friday, BofA is forecasting an increase of 80,000 jobs. That forecast sits above the Bloomberg consensus median of 65,000 and is well above the bank’s breakeven estimate of roughly 20,000. The unemployment rate is expected to remain at 4.3%, with a risk that the figure may round down to 4.2%, and labor force participation is projected at 61.9%.
"A strong print should go a long way to opening the topside of the expected Fed path distribution and bring the USD higher with it," FX Strategist Alex Cohen said. In short, BofA expects a materially stronger payrolls number to shift market expectations toward a higher probability of Fed tightening and to lift the dollar accordingly.
Why markets are not already pricing a dollar rally
Authorities at BofA say markets have been hesitant to price that tightening scenario. Current Fed funds futures imply only 5-6 basis points of additional rate hikes over the next 12 months. Market participants’ policy expectations are dispersed: roughly a 20% chance of further tightening, a 50-55% chance of no change, and a 25-30% chance of easing.
The bank identifies the expected approach of incoming Fed Chair Warsh as a central reason for this caution. "The market has been given sufficient reason to believe that the bar for rate hikes is high under incoming Fed Chair Warsh," Cohen said. BofA characterizes that perception as "one key reason why the USD has struggled to rally against a backdrop of improving outright and relative macro fundamentals, and higher oil prices."
Global policy contrasts
BofA highlights a contrast within the G10 central bank landscape. Since the onset of the war referenced in the analysis, pricing for potential rate moves across the bloc has shifted notably. The Reserve Bank of Australia delivered a 25 basis point hike on May 5, while pricing around Fed moves has largely remained flat. That divergence helps explain why currencies outside the dollar have not simply trended lower in the face of stronger U.S. data.
Rates markets and asymmetric reactions to payrolls surprises
The bank sees an asymmetric market reaction function to the upcoming payrolls print. A payrolls beat is expected to exert a larger impact on markets than a miss of equivalent magnitude, driven by a widening of the potential rate hike distribution.
Options pricing around the release reflects elevated expected volatility in Treasuries: the options market is implying a move of 6-6.5 basis points in 10-year Treasury yields around the jobs release, above the historical average range of 4.9-5.4 basis points.
BofA’s historical sensitivities show that, since 2023, a 100,000-beat in NFP relative to Bloomberg consensus has produced roughly a 7 basis point increase in 2-year Treasury yields. Since 2025, the sensitivity to comparable misses has fallen to about 4 basis points. The bank notes that an unemployment rate print of 4.2% or below would lie outside the full range of projections in the Fed’s March Summary of Economic Projections and would likely add further hike risk premium to rates.
Downside scenarios and expected market containment
On the downside, BofA says a soft jobs report "should weigh on the USD," but judges that subsequent moves would probably remain contained. Over the past year, the net move in EUR/USD in the hours following U.S. jobs reports has seldom exceeded plus or minus 0.5%.
Recent payroll history
BofA’s note recalls the recent pattern in monthly employment data. March payrolls came in at 178,000 against a consensus of 65,000, while the unemployment rate fell to 4.3% from 4.4%. February featured a notable miss, with payrolls down 92,000 versus a forecast of 55,000.
Implication
The bank’s central message is that the dollar’s performance hinges less on the current slate of macro outcomes than on how those outcomes alter market beliefs about Fed policy. A stronger-than-expected jobs report would widen the distribution of possible Fed moves and, in BofA’s view, give the dollar room to appreciate. Conversely, continued confidence that the bar for hikes is elevated under the incoming Fed chair would keep the currency’s gains in check.