Synopsis:

Bank of America (BofA) has updated its EUR/USD exchange rate forecast, reflecting a delay in anticipated Federal Reserve rate cuts following robust U.S. economic data. The bank now expects a gradual appreciation of the EUR against the USD, maintaining a long-term target of 1.20 by the end of 2025.

Key Points:

• Adjustment of EUR/USD Path: BofA has shifted its EUR/USD forecast slightly, extending the expected timeline for the pair's appreciation. The bank predicts the EUR/USD will stabilize at 1.07 in Q2—aligning with previous Q1 forecasts and near current spot levels—before appreciating to 1.10 in Q3 and 1.12 in Q4, revised down from earlier projections of 1.12 and 1.15, respectively.

• Long-term Outlook: The forecast for the end of 2025 remains unchanged at 1.20, assuming a convergence towards long-term equilibrium. This projection is underpinned by a gradual forecast profile and moderate USD appreciation this year, despite significant repricing in rates and unexpectedly strong U.S. data.

• Influence of ECB Policy: The European Central Bank's (ECB) anticipated rate cuts are already fully factored into current pricing. There exists a risk that the ECB may cut rates less than expected, which could influence the EUR/USD trajectory.

• Upside Risks to USD: Potential risks that could lead to a stronger USD include further delays in Fed rate cuts extending into the next year, which might push EUR/USD below 1.05 or even towards parity, particularly if the ECB proceeds with rate cuts amid heightened geopolitical tensions and rising energy prices.

• Global Inflation Concerns: There are also concerns that inflation might remain elevated globally due to tight labor markets, which could limit the extent of rate cuts globally and place downward pressure on the USD.

Conclusion:

Bank of America's revised forecast for the EUR/USD exchange rate reflects a cautious but gradually appreciating outlook for the euro against the dollar. The adjustments account for recent strong U.S. economic performances and a reevaluation of the Fed's monetary policy timeline. Investors should monitor further developments in U.S. economic indicators, Fed communications, and ECB actions, as these factors will be crucial in shaping the future movements of EUR/USD.