EUR/USD weakness unlikely to stay as dollar bears to return: BofA

Bank of America strategists forecast a significant weakening of the U.S. dollar against the euro, projecting EUR/USD to reach $1.20 by year-end and $1.25 by end-2026. This bearish dollar thesis is predicated on an expected dovish Federal Reserve pivot, influenced by political pressure and reduced independence, alongside a strengthening Eurozone economy fueled by Germany's planned fiscal expansion. Despite recent euro weakness, BofA anticipates a "regime shift" as the dollar remains overvalued and euro area growth is poised for acceleration.

Analysis

Bank of America (BofA) strategists have reiterated a bearish outlook for the U.S. dollar, projecting the EUR/USD exchange rate will reach $1.20 by year-end and $1.25 by the end of 2026. The core of this thesis rests on a dual narrative: an anticipated dovish pivot from the U.S. Federal Reserve, driven by mounting political pressure and perceived reduced independence, and a strengthening Eurozone recovery. The primary catalyst for euro strength is identified as a planned German fiscal expansion, which BofA deems a "game-changer" capable of accelerating Euro area growth to converge with that of the U.S. From a market positioning and valuation perspective, the report notes that the dollar remains overvalued against nearly all G10 currencies and that short positions are not yet crowded, suggesting further room for depreciation. However, BofA also outlines key risks to this outlook, including potential delays in European fiscal stimulus, near-term political noise from France, or a resurgence of U.S. economic outperformance that could temper the Fed's dovish stance.

Key Decisions for Investors

• Investors with a medium-term horizon could consider positioning for euro appreciation against the dollar, in line with BofA's forecast of a 'renewed downtrend' for the USD and price targets of $1.20 and $1.25 for EUR/USD.
• Closely monitor the implementation and scale of Germany's proposed fiscal stimulus, as it is cited as the primary 'game-changer' for accelerating Eurozone growth and underpinning the bullish euro thesis.
• Traders should watch for key U.S. policy signals, particularly any confirmation of a Federal Reserve dovish pivot, as this is a central pillar of the bearish dollar forecast, while also remaining aware of risks such as a hawkish Fed surprise or delays in European fiscal action.