Bank of America is maintaining a cautious short-term outlook on the euro, arguing that exposure to energy-market shocks and a continued U.S. growth advantage may place downward pressure on the common currency in coming months.
Analysts at the bank note that investor positioning and sentiment around the euro have eased in recent weeks, yet their near-term bias stays negative. Markets for energy futures are still pricing fairly optimistic outcomes, especially regarding developments in the Middle East, a factor the bank sees as a potential source of volatility for the euro area.
On the demand side, the U.S. economy is expected to remain comparatively stronger than the euro area. Bank of America points to ongoing investment connected to artificial intelligence and the residual support from earlier fiscal measures as contributors to the U.S. advantage. This divergence in underlying momentum between the two economies is cited as a driver that could keep upward pressure on the dollar relative to the euro.
Europe's economy is judged to be more exposed to higher energy costs. The bank emphasizes that natural gas prices have historically exerted a larger influence on euro-area economic activity, leaving the currency sensitive to any disruptions or sharp moves in energy markets.
Looking further ahead, Bank of America presents a more constructive scenario. If energy markets normalize gradually and euro-area growth picks up later in the year, these developments could boost the euro heading into the fourth quarter. That longer-run view tempers the bank's immediate caution but does not negate near-term risks.
Investor sentiment toward Europe has already weakened notably. European bond yields have fallen since the start of the Middle East conflict, surveys indicate growing pessimism about European equities, and recent capital flows have favored regions outside Europe. Together, these shifts in sentiment and flows are part of the backdrop informing the bank's cautious near-term stance.
Valuation models referenced by the bank imply the euro remains undervalued against a number of major currencies, including the U.S. dollar, Norwegian krone, Australian dollar, and Japanese yen. The bank also notes that European Central Bank policy could lend support to the currency if inflation stays under control and policymakers refrain from tightening beyond current market expectations. Efforts to strengthen the euro's international role are flagged as a potential longer-term tailwind.
On balance, the bank highlights progress on European reforms as the principal upside risk for the euro. Conversely, the main downside risks it identifies are higher energy prices, a more hawkish ECB stance, and political uncertainty in France.
Strategically, analysts at the bank suggest that EUR/USD readings below their second-quarter forecast of 1.14 could offer opportunities to add dollar hedges in anticipation of an eventual alignment between U.S. and euro-area growth trends.