Synopsis:

BofA maintains a bullish stance on the euro (EUR) against the Swiss franc (CHF) and Japanese yen (JPY) but recommends fading EUR rallies against the British pound (GBP), Australian dollar (AUD), and Scandinavian currencies (Scandies). The mixed performance of EUR-G10 currencies is expected to continue through 2024, influenced by the European Central Bank’s (ECB) positioning and constructive risk sentiment.

Key Points:

• EUR-G10 Performance:

  • This year’s modestly strong EUR performance across G10 currencies aligns with recent historical trends. BofA expects this mixed performance to persist, with EUR’s movement largely driven by the ECB's stance and overall risk sentiment.

• Overvalued and Undervalued Pairs:

  • BofA’s analysis shows EUR is overvalued against JPY and NOK, and slightly undervalued against USD and GBP. They are particularly cautious with EUR-GBP and EUR-AUD pairs.

• ECB’s Influence:

  • The ECB has been repriced higher against most G10 peers, which, along with persistent core CPI and cautious positioning, has supported EUR's performance. BofA anticipates two more ECB cuts in 2024, influencing EUR’s behavior more in cross pairs than against the USD.

• Future EUR Outlook:

  • BofA forecasts EUR-USD at 1.12 by year-end, with the pair’s trajectory more influenced by US Federal Reserve actions than ECB decisions. They expect constructive risk sentiment, driven by a soft US landing and Fed rate cuts, to push the USD lower.

• Strategic Positioning:

  • BofA remains constructive on EUR against CHF and JPY, expecting these pairs to continue performing well. However, they recommend fading EUR rallies against GBP, AUD, and Scandinavian currencies, considering potential risks tied to positioning, especially in EUR-GBP and EUR-AUD.

Conclusion:

BofA expects the EUR to perform well against CHF and JPY while remaining cautious on its rallies against GBP, AUD, and Scandies. The mixed EUR-G10 performance is likely to persist, with ECB policy and broader risk sentiment being key drivers. They forecast EUR-USD at 1.12 by year-end, influenced more by Fed actions than ECB policies.