Synopsis:
Bank of America reaffirms its EUR/USD 1.17 year-end forecast, citing structural, policy, and flow dynamics. While US tariffs and Fed constraints limit the USD's upside, Europe’s evolving fiscal stance and asset allocation flows are increasingly supportive for the euro.
Key Points:
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Tariffs Are Worse for the US Than Europe:
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Tariff shocks will likely hurt US demand more than Europe.
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The ECB retains room to support growth, while the Fed is constrained.
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Europe may seize this moment to advance reform agendas (Letta/Draghi reports) and pursue alternative trade partnerships.
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Europe’s Fiscal and Defense Upside Is Underpriced:
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Markets have yet to fully factor in Germany’s fiscal package and Europe’s defense spending shift.
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BofA expects defense outlays to rise structurally to 3–3.5% of GDP, with a degree of fiscal mutualization, especially after the June NATO and EU summits.
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Real Money Still Underhedged:
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Despite increased EUR positioning, Real Money investors remain underweight the currency.
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Post-Covid, many European asset managers cut USD hedges; this is now expected to reverse.
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The USD remains overvalued, FX correlations have shifted, and volatility may persist, increasing hedging incentives.
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Conclusion:
EUR/USD remains well-positioned for further upside. BofA sees rotation into European assets, rising hedge ratios, and Europe's policy trajectory as drivers that could propel the euro beyond 1.17 by year-end.
