Bank of America shares recent outlook for EUR/USD

Investing.com - Bank of America strategists remain near-term bearish on the euro, forecasting EUR/USD to reach 1.14 by the end of the second quarter, and even with additional rate hikes from the European Central Bank (ECB), the downside risks still look significant.

Get deeper FX market insights on InvestingPro - save up to 50%

As the Iran war enters its second month and keeps energy prices elevated, Bank of America issued this outlook. Bank of America’s economists and commodities strategists currently assume oil prices are close to $100 per barrel, with Dutch TTF natural gas prices at around EUR 90 per megawatt-hour by year-end.

Strategists led by Alex Cohen said in a report: “This outlook implies inflation will face renewed upside pressure, while growth will face downside pressure, and the euro area will be affected more than the United States.”

Bank of America currently expects 2026 euro-area CPI to average 3.3%, a significant upward revision from the previously forecast 1.7%, while the U.S. revision is smaller, rising from 2.8% to 3.6%—the strategists attribute this gap to the contrast between U.S. energy independence and Europe’s dependence on imported oil and natural gas.

The changing inflation backdrop is also affecting rate expectations. Bank of America now expects the ECB to raise rates twice this year, in June and July, and it says there is a possibility of a rate hike at the April meeting, with a third hike also possible.

Meanwhile, the Federal Reserve is expected to cut rates twice, but those actions have been pushed back to September and October, and the bank also noted there is a risk of completely no rate cuts. The strategists wrote: “Our outlook for the Federal Reserve is clearly more dovish than the market’s expectations for 2026.”

The team said this divergence creates a complicated backdrop for the currency pair. Compared with the Federal Reserve, which prioritizes the labor market, the ECB—focused on protecting its inflation credibility—could become a tailwind for EUR/USD as the process progresses through this quarter.

But the strategists said that, from a practical perspective, conditions are unfavorable for the currency, because higher inflation in the euro area erodes the real interest-rate advantage that nominal ECB rate hikes were meant to provide.

Historical precedents also add to the skepticism. The ECB’s brief hiking cycles in 2008 and 2011 were both accompanied by EUR/USD depreciation, as concerns about growth ultimately outweighed the impact of inflation.

Looking further out, Bank of America maintains its long-term bearish view on the dollar, forecasting EUR/USD will reach 1.20 by year-end, but only if the Fed does not raise rates, energy prices normalize, and growth in the United States and the euro area gradually converges.

This article was translated with the assistance of AI. For more information, please see our Terms of Use.