Bank of America (BofA) expects the EUR/USD to rally to 1.10 by the end of the year, a view that stands well above the market consensus of 1.05.
While the euro may face near-term weakness, analysts believe the currency pair will gain strength as the year progresses.
"Our G10 FX forecasts for the year reflect the view that the USD would be broadly supported through Q1, before gradually depreciating throughout the back half of the year,” BofA strategists led by Alex Cohen said in a note.
“For the EUR/USD specifically, this would mean some further near-term weakness (but stopping short of parity), before rallying to 1.10 by year-end; well above consensus," they added.
On the US dollar side, BofA highlighted the currency's strong fundamentals but warned that it might be "priced to perfection."
The report pointed to the risks associated with proposed economic policies, which could either lead to higher inflation or unexpected growth concerns, impacting the dollar's relative strength. "USD sentiment was bullish to start the year, and 'long-dollar' views are well positioned," the strategists noted.
For the euro, the outlook is shaped by cautiousness around trade uncertainties and monetary policy decisions. However, BofA sees "underappreciated upside risks" that could drive the euro higher, including a potential resolution in Ukraine, German elections, and “broader EU reforms and/or more European defense spending," the report stated.
Moreover, BofA strategists noted that the narrative of US exceptionalism, which has supported the dollar, appears to be losing momentum.
While the US economy continues to perform well, there are growing concerns about fiscal reliance, narrowing trade deficits, and the potential negative impact of a persistently strong dollar on capital flows and equity performance.
In summary, the strategists expect the EUR/USD pair to hover near their mid-year forecasts, with parity likely avoided unless new risks arise.
Though the path may be uneven, the dollar's elevated valuation, potential growth uncertainties in the US, and possible upside surprises in the euro area support their above-consensus outlook for the year.
