Key Moments
- EUR/USD traded at $1.1635, up 0.1%. The pair remains on track for annual gains of more than 12%.
- Bank of America Securities projects EUR/USD at $1.22 by the end of 2026. Most dollar weakness is expected to emerge after the first quarter.
- BofA expects the ECB to deliver at least one more rate cut, likely in March. The bank does not anticipate any hikes through 2027, which creates a modest near-term headwind for the euro.
Euro Rally Backed by Constructive Outlook
Analysts at Bank of America Securities stay positive on the euro’s prospects through 2026. They highlight a more favorable backdrop for upside surprises in Europe compared to the end of the second quarter.
At 08:50 ET (13:50 GMT), EUR/USD traded 0.1% higher at $1.1635. As a result, the pair remains on pace for annual gains exceeding 12%.
Shift in Market Sentiment Toward Europe
According to a Dec. 10 note from Bank of America, initial optimism around Europe has cooled. Foreign exchange markets now assign meaningful risks to policy implementation, German fiscal initiatives, and European defense spending. They also continue to discount the likelihood of substantial reforms.
The analysts wrote, “Following the initial euphoria, Europe sentiment has considerably moderated. The FX market seems to attach several (implementation or other) risks to German fiscal and European defence spending, while expecting little on reforms.”
They added that these developments contrast with other major economies. “Fiscal hopes in Europe are in sharp contrast with recurrent concerns in the U.S., Japan, and U.K.,” they said.
Bank of America Targets Higher EUR/USD by 2026
BofA forecasts EUR/USD at $1.22 by the end of 2026. The bank expects most USD weakness to appear after the first quarter. Additionally, the euro is projected to appreciate against both the Japanese yen and the British pound.
| Pair / Outlook | Details |
|---|---|
| EUR/USD spot | $1.1635 at 08:50 ET (13:50 GMT), up 0.1% |
| EUR/USD full-year performance | On course for gains of over 12% |
| EUR/USD end-2026 target | $1.22 |
Growth Convergence and External Support
Bank of America’s constructive view on the euro is driven mainly by macroeconomic trends. The bank expects the U.S. and euro area to see growth convergence in the second half of 2026.
Moreover, BofA projects that euro area growth will accelerate in late 2026 and extend through 2027. This outlook reflects Germany’s fiscal package and stronger external demand. The bank also assumes China will ease policy in late Q1 or early Q2.
ECB Policy Seen as Modest Near-Term Headwind
On the monetary policy front, BofA expects the European Central Bank to exert a slight near-term drag on the euro. The economists anticipate at least one additional rate cut, likely in March, and no hikes through 2027.
However, they stress the importance of real rates. “Still, we would focus on real rates: we expect an inflation undershoot in the EA, but an overshoot in the U.S. and several economies,” they noted.
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