BofA - Liquid Insight: EUR in a less USD world

Key Takeaways:

• EUR's transformation from zero to hero: US reciprocal tariffs are detrimental to Europe, but even more damaging to the US. Germany's fiscal shift is a significant game-changer.

• Upside risks to our already optimistic forecasts stem from the EU's measured response, new trade deals with the rest of the world, EU reforms, and increased fiscal measures.

• Real Money remains a crucial group to monitor. The EUR stands to gain from ongoing shifts towards Europe and higher USD hedge ratios.

Shifting Goalposts

The sentiment towards the euro (EUR) has significantly improved since the beginning of the year. While US reciprocal tariffs could impact Europe, they are likely to affect the US even more. We anticipate potential upside risks for the EUR due to a measured EU response, ongoing EU reforms, and efforts to establish trade deals globally. Following Germany's fiscal policy shift, we foresee further upside risks to our already optimistic EUR forecasts, predicting EUR-USD at 1.15 this year and 1.20 next year, driven by potential additional joint EU issuance later this year.

On the flow side, the EUR could benefit substantially from continued asset reallocation toward Europe and increased hedging ratios by European asset managers. Our data indicates that Real Money engagement has been relatively modest compared to post-2012 levels, while Officials continue to rebalance. Sanity checks suggest the EUR has outperformed. We maintain a bearish stance against GBP and "high beta" currencies but remain bullish against USD, JPY, and CHF, believing the EUR's goalposts are just beginning to shift.