Currencies August 18, 2026 05:55 AM

BofA Sees Euro Sliding Against Dollar Through Q3 on Fed Outlook and Oil Moves

Bank of America points to stronger U.S. data, a hawkish Fed and short-term oil strength as drivers of a firmer dollar into the third quarter

By Priya Menon
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Bank of America expects the euro to depreciate versus the U.S. dollar through the end of the third quarter, citing firmer U.S. economic readings and a more hawkish Federal Reserve stance. The bank also notes that near-term higher oil prices should bolster the dollar, while a subsequent fall in oil and full market pricing of Fed rate steps could reverse the trend after Q3. No numerical EUR/USD targets were provided.

BofA Sees Euro Sliding Against Dollar Through Q3 on Fed Outlook and Oil Moves
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Key Points

  • Bank of America expects the euro to weaken versus the U.S. dollar through the end of Q3, citing stronger U.S. economic data and a more hawkish Federal Reserve.
  • Higher oil prices in the short term are seen by the bank as additional support for a firmer dollar into Q3.
  • After Q3, the bank anticipates the dollar may weaken if oil prices decline and Fed rate hikes become fully priced into markets. Sectors impacted include foreign exchange markets, energy, and export/import sensitive industries.

Bank of America projects weaker euro into Q3

Bank of America said it expects the euro to weaken against the U.S. dollar through the end of the third quarter. The bank attributed this outlook primarily to stronger-than-expected U.S. economic data and a Federal Reserve that it views as having a more hawkish stance.

In its outlook, the bank highlighted that higher oil prices over the short term should also lend support to the dollar during the same period. That combination - resilient U.S. data, a tighter Fed tone and firmer oil - is cited as the rationale for a stronger dollar relative to the euro through Q3.

Outlook beyond Q3

Looking past the third quarter, Bank of America said the dollar is likely to weaken. The bank linked that prospective easing of dollar strength to two factors: a decline in oil prices after the short-term rise, and markets fully pricing in the Federal Reserve's interest rate increases. The institution did not provide numerical targets for the EUR/USD exchange rate in its commentary.

Context and market note

The euro-dollar pair remains one of the most actively traded currency pairs in global foreign exchange markets. The bank's view presents a two-stage scenario - dollar appreciation through Q3 followed by depreciation thereafter - contingent on oil behavior and how rapidly Fed moves are absorbed by markets.

Implications for market participants

  • Currency traders may position for a stronger dollar into the end of Q3 given the drivers cited by the bank.
  • Participants sensitive to oil price swings could see related impacts on FX moves, as the bank explicitly connects oil dynamics to dollar strength.
  • Because the bank offered no specific EUR/USD targets, market reactions will depend on evolving data and how traders interpret the timeline for Fed pricing.

Bank of America did not supply numerical exchange-rate forecasts in the note, and its forward-looking comments link near-term and subsequent FX moves to oil price direction and the degree to which Fed rate increases are priced into markets.

Risks

  • Path of oil prices - a sustained rise could prolong dollar strength, while a decline could contribute to dollar weakness after Q3; this affects energy and commodity-linked sectors.
  • Federal Reserve pricing - if markets do not fully price in Fed rate increases as the bank expects, the timing and magnitude of FX moves could differ, impacting financial markets and interest-rate sensitive sectors.
  • U.S. economic data trajectory - stronger data underpins the bank's near-term dollar view, so unexpected changes in the U.S. economic picture would introduce uncertainty for currency markets and trade-exposed industries.

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