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Investing.com -- Bank of America (BofA) is going long on the euro against the U.S. dollar (USD), saying “increasing US stagflationary risks reinforce our bearish USD view” and pointing to the prospect of a Federal Reserve pivot as key headwinds for the greenback in the second half of the year.
The bank recommends entering the trade at 1.1612, targeting 1.20 by year-end with a stop at 1.1392.
“We remain bearish on USD, and see potential for further downside in H2,” BofA strategists led by Alex Cohen wrote, noting that July data, particularly nonfarm payrolls and ISM services, “reignited stagflationary concerns; something we view as USD negative.”
Even if inflation stays sticky and the Fed delays cuts, the bank sees renewed easing as a matter of “when” not “if,” with risks of faster and deeper rate cuts than currently priced if growth weakens. Leadership changes at the Fed further underscore the downside risks.
On the euro side, BofA argues that “the bar for positive European surprises on the policy/economic front is low (and even lower than before).” Hopes for fiscal support and the ECB’s capacity to add stimulus contrast with U.S. fiscal concerns and policy trade-offs.
The bank also notes that even as the bearish USD narrative has grown this year, USD positioning remains light, while EUR longs are not stretched.
The biggest near-term risk to the trade is Tuesday’s U.S. CPI report, with BofA forecasting a 0.3% month-on-month core print. An upside surprise could see the dollar rebound from post-employment report losses, but the bank expects “downside labor market concerns to supersede upside inflation risks.”
Other risks include weaker euro area data, such as upcoming GDP and PMI releases, or a strong August U.S. employment report.
Still, BofA maintains that “any soft data between now and the September FOMC opens the door” for a larger or faster pace of Fed cuts, which would likely weigh further on the dollar.