The British pound and the euro are both vulnerable to the rise of the US dollar.
As long as the Federal Reserve continues to raise interest rates, the dollar will remain strong, according to the bank. The dot plot shows that the Fed raised rates by 75 basis points last week and that there will be more in the near future.
That, combined with a questionable move by the UK government to slash taxes despite hot inflation, means the DXY dollar index probably won't top out until early 2023.
"With markets repricing a higher federal funds terminal rate, we believe the dollar is set to be stronger for longer over the next six months." Since the beginning of the year, the DXY dollar index is up 18%.
The US dollar gained more than half a percentage point on Monday after surging 2% on Friday.
Setting up the dollar to strengthen further against the euro is the ongoing Russia-Ukraine war, which could cause energy prices to go up and cause the euro to go down.
The economic outlook for Europe is likely to be affected by this. The euro is being kept as least preferred by us.
The pound is likely to be under pressure when it comes to the UK's debtsustainability. The pound fell to a record low against the dollar over the weekend after the UK's finance minister doubled down on fiscal stimuli.
Concerns about the fiscal package putting Britain's public finances on an unsustainable trajectory were reflected in the reaction. "We don't see enough measures in the package that are likely to boost economic growth over the medium term."
The US dollar is likely to benefit from its safe-haven quality and its yield advantage.
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