Overview
Bank of America has revised its G10 foreign-exchange forecasts for the remainder of 2026, reducing its euro-dollar projections and turning more constructive on the U.S. dollar in the near term. The bank said resilient U.S. economic data, combined with hawkish communications from the Federal Reserve under Chair Kevin Warsh, have helped underpin the dollar and prompted changes across several currency forecasts.
New EUR/USD targets
BofA now projects EUR/USD will trade at 1.12 by the end of the third quarter and finish 2026 at 1.15, down from an earlier end-Q3 forecast of 1.15. The bank expects the dollar to moderate only gradually over the medium term, while the euro's recovery will depend on a narrowing of the growth differential between the United States and the euro area.
Drivers cited by the bank
- Developments around U.S.-Iran relations and associated geopolitical risk.
- Stronger-than-anticipated U.S. economic readings that have supported the dollar.
- Hawkish signals from the Federal Reserve that could imply further policy tightening.
While easing geopolitical tensions have reduced pressure on oil markets, the bank said the stronger U.S. data and hawkish Fed commentary have been the primary forces lifting the dollar recently.
Outlook for the euro and other G10 currencies
BofA said that relative economic performance and the prospect of additional Fed tightening could weigh on the euro through the summer. The bank expects the divergence in growth between the U.S. and the euro area to peak in the coming months, with a subsequent pickup in euro-area activity later in the year supported by German fiscal stimulus and lower energy costs.
The bank also trimmed its end-2027 EUR/USD forecast to 1.20 from 1.25, while noting that the pair should recover gradually as euro-area growth strengthens and U.S. growth slows.
Adjustments to other currency forecasts
BofA made only modest near-term changes to forecasts for the Japanese yen and the British pound. It took a more dollar-positive stance on commodity-linked currencies: raising its USD/CAD outlook amid lower oil prices and an expectation that the Bank of Canada will remain on hold even as the Fed appears poised for further tightening, and lowering its AUD/USD forecast profile.
Risk considerations
The bank highlighted upside and downside risks for the dollar. Continued U.S. economic outperformance or any renewed escalation of tensions with Iran would be upside risks for the dollar, while weaker U.S. data that reduced the expectation of Fed rate hikes would be a downward risk.
Key points
- BofA cut its EUR/USD forecasts to 1.12 by end-Q3 and 1.15 at the end of 2026.
- The bank expects a stronger near-term dollar driven by resilient U.S. data and hawkish Fed commentary.
- It raised its USD/CAD outlook and lowered its AUD/USD profile, while only tweaking yen and pound forecasts modestly.
Risks and uncertainties
- Escalation in U.S.-Iran tensions could push the dollar higher and affect oil-sensitive currencies - relevant for energy and commodity sectors.
- Weaker-than-expected U.S. economic data could reduce Fed tightening expectations and weaken the dollar - relevant for fixed income and financial markets.
- Persisting divergence between U.S. and euro-area growth could pressure the euro through the summer - relevant to European exports and trade-exposed industries.
Conclusion
BofA's revised forecasts reflect a more dollar-favourable near-term stance driven by U.S. economic resilience and hawkish Fed signals, while leaving room for a gradual euro recovery later in the cycle as euro-area growth is expected to improve. The bank's moves on commodity-linked currencies also underscore the influence of oil prices and central-bank positioning on FX outlooks.