BofA Sees More EUR/USD Downside Risk This Summer Ahead

Key Moments

BofA Flags Downside Bias in EUR/USD Ahead of ECB Decision

As markets await the upcoming policy announcement from the European Central Bank (ECB), Bank of America (BofA) has outlined a cautious outlook for EUR/USD over the coming months. The bank argues that the currency pair still has room to move lower as investors continue to underestimate the divergence between the euro area and the US.

BofA points to the backdrop of the ongoing Middle East conflict as an additional factor shaping the outlook, noting that this has influenced both risk sentiment and energy markets, with implications for the euro.

Growth and Policy Divergence Underpriced

BofA emphasizes that the gap in economic performance between the US and the euro area remains significant and is not fully reflected in current market pricing. According to the bank:

“There is a case to be made for EUR/USD to potentially trade through our Q2 forecast of 1.14, which is also just below its 12-month lows. The growth divergence between the US and euro area is notable and arguably being underpriced by rates markets.

But hope for a peace agreement in the Middle East has prevented larger themes from taking hold. Even as there has been some associated reprieve in energy markets, upside risks points to downside risks to the EUR (from a terms-of-trade perspective). This suggests a real possibility of further USD supportive Fed repricing, while ECB hikes could prove counter-productive for the EUR… We prefer to fade rebounds and continue to look for renewed downside.”

Strategic View: Fading EUR/USD Rallies

The bank’s stance implies a tactical strategy focused on selling into EUR/USD strength rather than positioning for a sustained rebound. The expectation of potential “USD supportive Fed repricing” is presented as a risk factor that could push the dollar higher, further pressuring the euro.

The comments also reflect concern that additional ECB rate hikes might not support the euro, and could instead prove “counter-productive” if they exacerbate growth concerns in the region.

ECB’s Policy Dilemma and Risks for the Euro

The ECB is described as being in a highly challenging position following its latest rate increase. The central bank is seen as needing to move policy toward more restrictive levels to strengthen its stance against inflation, while at the same time facing the danger of putting further strain on already fragile growth conditions.

Market focus is likely to intensify on how the ECB navigates this trade-off after the rate hike. The bank’s current strategy is viewed as a delicate balancing act: tightening enough to address inflation pressures without triggering a more severe economic downturn.

A key concern highlighted is that even a single policy error could tip the euro area into a recessionary downturn or, alternatively, an environment in which inflation remains problematic. In either scenario, the article notes that the euro would likely be one of the main casualties.

EUR/USD Outlook Summary