BofA Maintains Bearish Outlook on Euro as Fed Risks Increase
Bank of America reaffirmed its negative outlook on the euro on Wednesday, warning that the currency could face further downside pressure as economic growth in the United States continues to outpace that of the euro zone.
The bank also highlighted the growing possibility of a more hawkish Federal Reserve, which could strengthen the U.S. dollar and weigh further on the euro.
BofA Keeps Short Position on EUR/USD
The investment bank said it is maintaining its short EUR/USD position, citing a combination of weakening technical indicators and deteriorating fundamental support for the single currency.
According to BofA strategists, stronger-than-expected U.S. employment data released last week reinforced their bearish view. The report contributed to a break below a key EUR/USD uptrend line, signaling potential further weakness ahead.
The bank added that it plans to continue selling into rallies, viewing recent rebounds from the important $1.15 level as temporary rather than the start of a sustained recovery.
Growth Gap Between the U.S. and Europe Widens
A major factor behind BofA’s bearish stance is the widening growth divergence between the United States and the euro area.
The bank argued that financial markets may be underestimating the extent of this economic gap and its potential impact on currency valuations.
“The growth divergence between the U.S. and euro area is notable and arguably being underpriced by rates markets,” BofA stated.
Stronger economic performance in the United States could continue attracting capital flows into dollar-denominated assets, providing additional support for the U.S. currency.
Energy Risks Remain a Challenge for Europe
BofA also pointed to Europe’s vulnerability to energy market disruptions as a key risk for the euro.
Unlike the United States, which is a net energy exporter, the euro zone remains heavily dependent on imported energy. As a result, higher energy prices could create additional inflationary pressures while simultaneously slowing economic growth.
The bank warned that even if geopolitical tensions eventually ease, elevated gas and energy costs could continue to weigh on economic activity across the region.
ECB Rate Expectations May Not Support the Euro
While some investors expect the European Central Bank to eventually raise interest rates, BofA cautioned that such expectations may not necessarily provide meaningful support for the euro.
According to the bank, the euro zone’s weaker economic backdrop and greater exposure to energy-related shocks could offset any potential benefits from tighter monetary policy.
At the same time, the risk of further Federal Reserve tightening remains underappreciated by many economists.
Markets Reassess Federal Reserve Policy
BofA noted that financial markets have begun pricing in a higher probability of future Federal Reserve rate hikes, even though most economists are not yet forecasting additional policy tightening.
If expectations for higher U.S. interest rates continue to build, the dollar could strengthen further against major global currencies, including the euro.
EUR/USD Remains Near Key Support Levels
The euro was recently trading near the $1.15 level after experiencing a sharp decline following the latest U.S. jobs report.
With economic growth differences widening, energy risks persisting, and Federal Reserve expectations shifting, Bank of America believes the balance of risks remains tilted toward additional downside for the EUR/USD pair in the coming months.
