Bank of America's month-end rebalancing model is pointing to outflows in EUR/USD and GBP/USD heading into the month's fix — a signal that, while modest, leans mildly supportive of the US dollar.

In its note, the firm set out its methodology:

"We estimate FX rebalancing needs based on a conventional 60/40 portfolio of global equities & bonds. The underperformance of USD vs GBP & EUR denominated assets over August suggests rebalancing out of GBP (-1.3σ) and EUR (-0.6σ) and into USD."

The σ (sigma) readings are standard shorthand in banks' month-end flow notes, expressing estimated rebalancing needs relative to typical month-end levels, with larger deviations generally treated as the more market-relevant signals. On that scale, the sterling figure is the more pronounced of the two, though both remain modest. As with any such exercise, the numbers are model estimates built on assumptions about portfolio composition rather than observed trades, which is one reason they are read as a directional lean rather than a precise flow forecast.

Month-end rebalancing flows are a routine feature of currency markets. Institutional investors running balanced global portfolios periodically adjust their currency exposure to restore target allocations, and much of that turnover is executed around benchmark fixing rates — most prominently the 4 p.m. London fix, the WM/Refinitiv benchmark that anchors portfolio valuations and benchmarked execution in a market the BIS measured at roughly $7.5 trillion in average daily turnover in its 2022 triennial survey.

The estimated impact this time is small, but there may already have been some signs of it during the week. Both EUR/USD and GBP/USD are sitting lower this week, owing mostly to a drop on Wednesday around midday in Europe, which also comes after a mix of US data. EUR/USD — the most heavily traded currency pair in the global market — is down 0.3% so far this week, with GBP/USD down 0.4%.

The changes so far today are relatively light. Beyond any potential month-end flows, market participants will be more focused on Fed chair Warsh's keynote speech in Jackson Hole later — the annual economic policy symposium hosted by the Federal Reserve Bank of Kansas City, a venue where Fed chairs have delivered notable policy messages in past years. The timing of the speech falls right before the London fix, so it is likely to override flows in the bigger picture, although that does not mean things may not get messy as the month-end fix approaches later in the day. With a potential policy signal landing shortly before benchmark rates are set, the interaction between the speech and the fix window is the key dynamic to watch as month-end wraps up.

Overall, BofA's model is anticipating a very light impact — if any — from month-end flows in August. The full breakdown is available at Month-end fixing to be mildly supportive of the dollar - BofA.