Bank of America strategists reaffirm a cautious outlook on the euro, forecasting the EUR/USD currency pair at 1.14 by the end of the second quarter and cautioning that downside risks remain even if the European Central Bank raises rates.
The bank's economists and commodity strategists have adjusted their assumptions for energy markets in light of the Iran conflict, now modeling oil near $100 per barrel and Dutch TTF natural gas at about EUR 90 per MWh through year-end. Those energy assumptions, the strategists argue, translate into renewed inflationary pressure and slower growth - effects they expect to be more pronounced in the euro area than in the United States.
"This outlook implies renewed upside pressure on inflation and downward pressure on growth, more so in the Euro area than in the U.S.," the team led by Alex Cohen said in its note. BofA's latest projections raise the euro area consumer price index to an average of 3.3% in 2026, a significant increase from its prior estimate of 1.7%. By comparison, the U.S. CPI projection was revised from 2.8% up to 3.6%.
The strategists attribute part of this divergence to differing energy dynamics: the United States benefits from a greater degree of energy independence, while Europe remains more reliant on imported oil and gas. That contrast, they say, plays through both inflation and growth trajectories for the respective regions.
Those inflation revisions have altered expectations for monetary policy. BofA now anticipates two ECB rate hikes this year, penciled in for June and July, with the April meeting described as "live" and a third hike left as possible. For the Federal Reserve, BofA still expects two rate cuts but has pushed those moves out to September and October, and it notes the risk that the Fed may ultimately make no cuts at all. The strategists add that their Fed outlook is notably more dovish than market expectations for 2026.
The resulting policy divergence creates a nuanced environment for EUR/USD. On one hand, an ECB intent on defending its anti-inflation credibility relative to a Fed more focused on labor market conditions could support the euro as the quarter progresses. On the other hand, when adjusting for inflation, higher euro-area CPI reduces the real-rate benefit that nominal ECB hikes might otherwise confer - a factor that tilts against the currency in real terms.
The team also points to historical episodes for context, noting that the ECB's brief hiking cycles in 2008 and 2011 coincided with EUR/USD depreciation as concerns about growth ultimately outweighed inflationary drivers.
Looking beyond the near term, BofA retains a longer-term constructive view on the euro relative to the dollar only under a set of specific conditions: no additional Fed hikes, normalization of energy prices, and gradual convergence between U.S. and euro-area growth. Under those assumptions, the bank forecasts EUR/USD at 1.20 by year-end.
Note: This analysis reflects the projections and assumptions described by Bank of America strategists and does not introduce additional data or events beyond those noted by the team.