EUR/USD Outlook: Near-Term Weakness Before Recovery
Bank of America expects the euro to weaken against the U.S. dollar in the short term before regaining strength later in the year. Ongoing geopolitical tensions and disruptions in energy markets are delaying a broader shift away from dollar dominance.
Revised Forecasts After Middle East Developments
According to strategists led by Adarsh Sinha, the dollar is now expected to remain strong through the second quarter. The bank has revised its projections, forecasting EUR/USD to dip toward 1.14 in the near term. These adjustments reflect updated macroeconomic assumptions following the Middle East conflict, particularly regarding global growth and energy supply dynamics.
Before the escalation of tensions, BofA had anticipated a meaningful decline in the dollar starting in the second quarter. However, this outlook has shifted, as improving global growth prospects now appear less likely due to the ongoing energy shock.
Energy Shock and Persistent Dollar Strength
BofA analysts note that while the dollar rally has already priced in some of these risks, further upside remains possible. If geopolitical tensions persist, or even after they ease, energy supply normalization may take time, continuing to support the dollar.
The resilience of the U.S. economy—initially expected to underpin the dollar only in the first quarter—is now projected to extend into the second quarter. At the same time, high energy prices are weighing on growth in key regions such as the eurozone, China, and Japan, limiting downward pressure on the dollar.
Strong Dollar Trend Expected in Q2
Against this backdrop, BofA expects the dollar to strengthen against most major currencies during the second quarter. The bank also highlights that risks remain skewed toward additional dollar gains, particularly if geopolitical uncertainty continues.
Longer-Term EUR/USD Bullish Outlook
Despite the near-term weakness, BofA maintains a more optimistic outlook for EUR/USD later in the year. The bank reiterates its year-end target of 1.20, conditional on several factors, including no further interest rate hikes from the Federal Reserve, stabilization in energy markets, and a recovery in global economic growth.
Key Drivers Supporting Euro Strength
In the second half of the year, the euro is expected to benefit from improving fundamentals. Strategists highlight several key drivers, including stronger German economic growth, increased FX hedging activity, and a relatively low threshold for European Union reforms, all of which could support a stronger euro.
Outlook for Other Major Currencies
Beyond the euro, BofA remains most constructive on the British pound following the May local elections, although it maintains a cautious stance in the near term. Meanwhile, the bank continues to hold its most bearish outlook on the New Zealand dollar.
