Why BofA remains bearish on euro

Bank of America (BofA) has reaffirmed its cautious near-term outlook on the euro, currently trading around 1.15-1.16 against the US Dollar. The financial giant cites persistent energy market risks in Europe and sustained stronger US economic momentum as primary headwinds, suggesting continued pressure on the common currency in the immediate months. This near-term bearish outlook contrasts with BofA own longer-term bullish forecast for the euro by late 2026, creating a complex interplay for currency traders. Underlying this caution are critical macroeconomic divergences. Europe remains acutely vulnerable to elevated natural gas prices, with the ongoing Middle East conflict and potential disruptions to the Strait of Hormuz threatening supply chains and fueling inflation across the Eurozone. Meanwhile, the US economy is showcasing remarkable resilience, bolstered by significant AI investment and earlier fiscal measures, maintaining solid GDP growth forecasts of around 1.8-2.2% for 2026. This strength empowers the Federal Reserve to hold interest rates steady, creating a widening interest rate differentials that favors the dollar. Looking ahead, investors will closely watch for any normalization in European energy markets, which BofA believes could pave the way for euro area growth to improve later this year. The European Central Bank (ECB) is widely expected to hike rates by 25 basis points in June, with a potential follow-up in Q3, a move that could provide some support for the euro if inflation can be reined in. The eventual convergence of US and Eurozone growth trends, alongside anticipated Federal Reserve rate cuts later in 2026 and potential Chinese stimulus measures, are key factors BofA expects to eventually drive the euro higher, potentially towards the 1.22-1.25 range by year-end.