BofA Sees Euro Strength in 2026 on U.S. Rates Outlook and China Stimulus

Bank of America has issued a positive outlook for the euro in 2026, pointing to expectations of lower U.S. interest rates, potential risks to the Federal Reserve’s independence, and anticipated stimulus measures from China as key factors supporting the single currency.

According to the bank’s economists, economic growth in the United States and the euro area is expected to converge in the second half of the year. They also project that inflation in the euro area will be lower than in other G4 economies. In addition, Bank of America notes that fiscal conditions across much of Europe—excluding France—compare favorably with fiscal concerns emerging elsewhere among major developed economies.

The report adds that market sentiment could receive further support from the likely approval of a Mercosur trade agreement, as well as progress in trade discussions with India. Expectations of renewed foreign exchange hedging activity are also highlighted as an additional factor that could contribute to euro appreciation.

In the near term, however, the bank remains cautious on the euro. This stance reflects expectations for a final interest rate cut by the European Central Bank in March. Bank of America also observes that recent German fiscal developments appear to be more fully priced into markets than they were in early fourth quarter 2025.

While some investors view potential developments related to Greenland as a negative risk for the euro, Bank of America argues that the implications may be more complex. The bank suggests that if such concerns result in higher defense spending, they could disrupt traditional correlations between the U.S. dollar and U.S. assets, potentially altering the broader currency outlook.