Bank of America reaffirmed a bearish outlook on the euro, reiterating its short position against the U.S. dollar and citing a mix of weakening technical indicators and eroding fundamental support for the single currency.
Strategists at the bank said a more pronounced growth divergence between the U.S. and the euro area has become increasingly important to currency markets. They noted that stronger-than-expected U.S. payrolls data last week strengthened their view, triggering a breakdown below a previously established EUR/USD uptrend line. As a result, the team plans to continue selling into rallies, treating recent recoveries from the $1.15 area as temporary.
The bank highlighted several channels through which the euro is exposed. One central concern is the euro zone's higher sensitivity to energy market disruptions due to its reliance on imported fuel, in contrast with the United States which is a net energy exporter. Bank of America warned that elevated gas prices have the potential to inflict stagflationary pressure on the euro area even if geopolitical tensions ease over time.
Analysts at the bank also cast doubt on the idea that anticipated rate hikes from the European Central Bank will necessarily translate into durable euro strength. They argued that the bloc's softer growth backdrop and heightened exposure to higher energy costs - in part related to tensions in the Middle East - could limit the currency's support from expectations of future ECB tightening.
On the U.S. side, Bank of America noted that market pricing has begun to incorporate some probability of Federal Reserve rate increases. The bank nevertheless observed that most economists still do not forecast immediate tightening from the Fed, underscoring a source of repricing risk that could alter currency dynamics.
Market activity recently left the euro trading near $1.15 after a sharp drop earlier in the week that followed the U.S. employment report. Against that backdrop, Bank of America said it will maintain its short euro position and remain willing to sell into any intraday or short-term rallies.
Analysis takeaway - Bank of America's position rests on a combination of technical damage to EUR/USD, the prospect of a relatively stronger U.S. growth path, and structural vulnerabilities in the euro area tied to energy import dependence. These factors underpin the bank's view that rebounds around $1.15 are likely fleeting and that downside pressure on the euro may persist.