Bank of America (BofA) has reaffirmed its bearish position on the euro, warning that the single currency is likely to weaken further against the US dollar in the coming months. In a research note published this week, the bank's currency strategists highlighted a growing economic divergence between the Eurozone and the United States, with the latter showing more resilience amid higher interest rates and stronger consumer demand.
The euro has already fallen by around 2 per cent against the dollar so far this year, trading near $1.08 as of Wednesday. BofA expects the currency to slide to $1.05 by the end of 2025, driven by a combination of sluggish Eurozone industrial output, elevated energy costs, and the European Central Bank's (ECB) cautious approach to monetary tightening. The bank's analysts argue that the ECB will be forced to keep rates lower for longer compared to the Federal Reserve, reducing the euro's yield appeal.
For UK investors, the euro's weakness presents a mixed picture. Those holding euro-denominated bonds or European equities may see returns eroded when converted back to sterling. However, British exporters selling into the Eurozone could benefit from a stronger pound relative to the euro, as their goods become cheaper for European buyers. The FTSE 100, which derives roughly 70 per cent of its revenues from overseas, is less directly impacted, but many UK-listed multinationals with significant exposure to the continent may feel the pinch.
Analysts at BofA also noted that political uncertainty in France and Italy, combined with the ongoing energy transition costs, are weighing on investor sentiment towards the region. 'The structural challenges facing the Eurozone are not going away,' the note stated. 'We see limited catalysts for a sustained euro recovery in the near term.'
The bearish outlook aligns with broader market expectations. According to data from the Commodity Futures Trading Commission, speculative traders have increased their short positions on the euro in recent weeks. For UK pension holders, the currency risk is often hedged in diversified global funds, but those with unhedged European exposure should be aware of the potential drag on returns.
Source: Bank of America Global Research