EUR/USD weakness unlikely to stay as dollar bears to return: BofA

Investing.com -- The euro may be limping toward a second straight week in the red against the dollar, but BofA says don’t count on the slump lasting long. With the Federal Reserve turning dovish and Germany poised to drive a stronger eurozone recovery, the greenback’s grip looks shaky and the single currency could soon regain its footing.

A run at the dollar is coming

What appears as dollar strength masks growing policy risks at home. BofA’s FX strategists point to Washington’s mounting “political pressure to cut” and “reduced Fed independence over time,” which threatens the dollar with a “renewed downtrend” as the Fed pivots dovish on labor and rates.

“Our bearish USD thesis remains intact. Regardless of what the Fed does at the September meeting... we see scope for gradual depreciation into next year,” BofA said in a recent report, forecasting EUR/USD to hit $1.20 by year end and $1.25 by the end of 2026.

While the U.S. is contending with sticky inflation and uncertainty around tariffs as well as the labor market, euro-area prospects are brightening not least because of Germany’s plan to boost spending.

“A ‘lower bar for positive EUR surprises after the US-EU trade deal’ and a German fiscal push, expected to close the gap with U.S. growth, will likely give the single currency extra oomph.

"Our economists consider the German fiscal shift to be a game-changer… a key reason…Euro area growth [is seen] to accelerate from next year, converging to that of the US," BofA said.

Dollar positioning still has room to fall

The currency market is not yet crowded with dollar bears, with BofA noting that “USD shorts are not crowded, and EURUSD still below fair value.” Even with the euro’s recent wobble, quant and trend signals point to a bullish continuation for EUR/USD heading into 2026, supporting the view that “trend continuation is bullish for EURUSD” with price targets of 1.20 this year and 1.25 by end-2026.

The bearish dollar call, however, has caveats. Delayed German or European fiscal spending and near-term French political noise could weigh on the euro, while any resurgence of U.S. “exceptionalism” or Fed pushback on dovish policy could slow the dollar’s decline, BofA cautioned. But “USD remains overvalued vs. all G10 currencies except CHF, including EUR, according to our analysis,” it added.

For traders, the story is less about chasing short-term swings and more about preparing for a regime shift. Fed policy risks and euro-area growth drivers, BofA says, point to a fading dollar strength narrative and a brewing bullish case for the euro.