BofA sees EUR/USD falling to 1.12 as dollar strength persists

The euro traded at $1.1426 on Tuesday, little changed during July after falling 2% in June, as Bank of America maintained a bearish stance on the pair and forecast further declines through the third quarter.

"The Dollar's resilience despite narrowing short-term interest-rate spreads is encouraging for USD bulls," Bank of America strategists said in a note. The bank remains short EUR/USD, retaining a three-month put spread targeting the $1.15-$1.13 area.

US two-year rate differentials against the DXY basket narrowed by about 13 basis points after softer inflation data and increased expectations of rate rises elsewhere, yet the resulting dollar decline was comparatively modest. BofA believes medium-term growth prospects and five-year real yields currently provide a better guide to currency performance than front-end spreads, with US real-rate differentials remaining elevated and the American economy showing greater resilience than many peers.

Bullish dollar positioning is "far from historical extremes," the bank said, suggesting investors still have room to increase USD exposure despite the shift in sentiment since the June Federal Reserve meeting. BofA economists continue to forecast three Fed rate increases during the second half of 2026, compared with substantially less tightening currently priced by markets. The bank also cited diverging US and eurozone data, energy-price risks and supportive technical signals as factors weighing on the single currency.

The euro reached a 2026 high above $1.2075 in January before retreating, while June's low near $1.1325 marked its weakest level since July 2025. BofA forecasts EUR/USD at $1.12 by the end of the third quarter, before a recovery to $1.15 at year-end and $1.20 by the end of 2027. It remains cautious on the euro through the summer but retains a more constructive medium-term view as US and eurozone growth begin to converge.

The bearish call implies a further 2% decline from current levels, testing the June low. Investors will watch the Federal Reserve's July 29-30 meeting for any shift in the rate path that could alter the dollar's trajectory.

This article is for informational purposes only and does not constitute investment advice.