• Bank of America forecasts the euro will appreciate significantly against the U.S. dollar, reaching $1.20 by the end of 2025 and $1.25 by the end of 2026.
  • The call is predicated on the Federal Reserve resuming interest rate cuts despite sticky inflation, a move that would weaken the greenback.
  • Weak July jobs data and concerns over the Fed’s independence have fueled market expectations for faster and deeper cuts this year.

Bank of America has issued a bullish forecast for the euro, predicting a substantial climb against the U.S. dollar over the next two years. The bank’s analysts see the EUR/USD pair rising to $1.20 by the close of 2025 and advancing further to $1.25 by the end of 2026, a notable increase from its current level near $1.1620.

The core of this outlook hinges on a shifting monetary policy landscape. BofA anticipates the Federal Reserve will be compelled to resume its easing cycle, cutting interest rates even as inflation remains persistently above target. This dovish pivot, which would typically depress a currency’s value, is expected to be driven by softer economic data. The recently released weak July jobs report has already heightened market speculation for more aggressive Fed action. Furthermore, concerns are mounting in some quarters about the central bank's independence, adding pressure for a policy response and contributing to the dollar’s bearish momentum.

This view aligns with a broader consensus emerging among major forecasters, who similarly see the euro trending higher. The U.S. dollar index has already fallen 10% year-to-date, marking its weakest first-half performance in decades. The euro’s strength is also being bolstered by expectations of robust capital flows into European assets and a more measured approach to rate cuts from the European Central Bank, which has signaled that inflation is peaking.

Adding another layer of complexity are newly announced reciprocal tariffs between the U.S. and the EU. This escalation in trade policy uncertainty has prompted growth downgrades and inflation concerns, creating additional cross-currents that are contributing to dollar weakness. A weaker dollar, while potentially beneficial for U.S. exporters, could raise costs for American consumers through higher import prices and increased overseas travel expenditures.

For corporate stakeholders, the shifting FX landscape presents a mixed bag. Multinational companies with significant international earnings could face currency translation headwinds, while those focused on exporting may find a competitive advantage. Bank of America’s forecast suggests these dynamics are not a short-term blip but the beginning of a sustained trend of dollar weakness, barring an unexpected resurgence in U.S. economic growth or a sudden hawkish pivot from the Fed.