In the center of a large area with no notable economic, social, geographic, cultural, or other values. The "Fucking" aspect of the phrase is usually associated with the frustration that comes with being located in the "Nowhere" that is being referred to.
Well done Terry, now the car's smashed up and we're IN THE MIDDLE OF BUTTFUCK NOWHERE, all because you had to hotbox THE FUCKING CAR WHILE DRIVING... WITH THE WINDOWS UP! FUCK YOU TERRY. FUCK YOU.
Just like that Hillbilly's over there's going to do.
A place located in such an obscenely obscure part of the worldthat one would rather fuck his/her own sister/brother than to even fathom venturing to it for any reason. At all. Ever.
Ted: Hey man, can you take me home?
Bob: Sure bro, where do you live?
(Ted gives his address)
Bob: No way, man. That's in the middle-of-ass nowhere. Good luck finding someone to haul your ass all the way out there.
Carla: Oh shit, we're lost. And we're in the middle-of-ass nowhere.
Brandon: Oh God, I'd legitimately rather be fucking my own sister than sitting here.
Carla: I AM your sister, Brandon.
Brandon: ...I'll grab the condoms from the truck.