Euro’s Resilience Faces Renewed Bearish Pressure, Bank of America Predicts Further Decline
The euro, which has recently shown resilience against the dollar following a post-U.S. election slump, is now facing renewed bearish pressure, according to Bank of America strategists. Despite the Federal Reserve’s anticipated rate cut next week, the bank believes the euro’s upside potential is limited, with a higher probability of further decline. They predict the euro could fall below 1.05 against the dollar, driven primarily by anticipated new tariff headlines under the incoming Trump administration.
Bank of America’s bearish outlook stems from several key factors. Firstly, they argue that the expected Fed rate cut is already largely priced into the current EUR/USD exchange rate. Furthermore, they anticipate the Fed will adopt a more hawkish stance in its updated outlook, signaling a shallower rate cut cycle than previously anticipated. This hawkish tilt could potentially bolster the dollar and exert downward pressure on the euro. Secondly, the bank highlights the potential impact of new tariffs under the Trump administration. They believe that these impending tariff announcements could significantly weigh on the euro, pushing it below the 1.05 mark.
Technical indicators further support Bank of America’s bearish view. The relative strength index and the spot/50-day simple moving average ratios suggest that the recent bearish price action in EUR/USD is not overextended, indicating room for further decline. While acknowledging that a positive surprise in the upcoming U.S. Consumer Price Index (CPI) data could temporarily weaken the dollar, the strategists point out that the EUR/USD pair has historically shown a low correlation with U.S. CPI surprises. Therefore, even a weaker dollar driven by CPI data might not translate into a significant euro rally.
The impending change in U.S. presidential administration adds another layer of complexity to the euro’s outlook. As President-elect Donald Trump prepares to take office, the market anticipates potential shifts in trade policy, particularly concerning tariffs. Bank of America strategists believe these potential tariff headlines pose a significant downside risk to the euro. The uncertainty surrounding the new administration’s trade policies, coupled with the expected hawkish tilt from the Fed, creates a challenging environment for the single currency.
While the euro has managed to recoup some losses against the dollar, the underlying factors point towards a renewed bearish trend. Bank of America’s analysis suggests that the upside potential for the euro is limited, with a higher likelihood of further decline. The combination of a hawkish Fed, anticipated tariffs, and technical indicators all paint a bearish picture for the EUR/USD pair in the near term. Investors should therefore be prepared for potential further weakening of the euro against the dollar.
In conclusion, the euro’s recent resilience against the dollar appears to be facing a significant challenge. Bank of America’s analysis suggests that the euro’s upside is limited, and a further decline is more likely. The anticipated hawkish shift from the Fed, the potential for new tariffs under the incoming Trump administration, and technical indicators all point towards a bearish outlook for the single currency. Investors should closely monitor developments in U.S. monetary policy and trade policy, as these factors are likely to play a crucial role in determining the euro’s future trajectory.
