Bearish bets on EUR/USD attractive again after latest fightback: BofA

Investing.com -- The euro has been fighting back against the dollar, following its a post-U.S. election ride lower, but Bank of America (NYSE:BAC) says now is the time to to renew bearish bets on the single currency again.

"ForEUR/USD, we believe that there is limited upside potential to 1.06 but more room to the downside, as the pair could fall below 1.05 on the back of new tariff headlines," strategists from Bank of America said in a recent note

The relative strength index and spot/50-day simple moving average ratios suggest that bearish EUR/USD price action is no longer stretched, they added.

The bearish outlook on the euro comes even as the Federal Reserve is expected to cut rates next week. However, this cut is largely priced into EUR/USD, the strategists said, expecting the updated Fed outlook to reflect a shallow rate cut cycle.

"[W]hile the Fed will cut next week, the Fed's consensus (median) will be to tilt the outlook in a more hawkish direction than in September or November," Bank of America analysts noted in a recent report.

An upside surprise in U.S. CPI, a measure of inflation due Wednesday, could weaken the dollar, but the impact will likely be temporary.

While a negative surprise in U.S. CPI data this week could initially weaken the dollar, the EUR/USD has shown "the lowest correlation to U.S. CPI surprises in this cycle," the strategists said.

As well as an expected hawkish tilt from the Fed next week on rate outlook, the EUR/USD is likely to come added pressure from the potential tariff headlines as President-elect Donald Trump officially takes the presidential reins next month.

"For EURUSD, we believe that there is limited upside potential to 1.06 but more room to the downside, as the pair could fall below 1.05 on the back of new tariff headlines," strategists from Bank of America said in a recent note

The relative strength index and spot/50-day simple moving average ratios suggest that bearish EUR/USD price action is no longer stretched, they added,

The bearish note on the euro comes even as the the Federal Reserve is expected to cut rates next week. But the cut is largestly priced into EUR/USD, the strategists said, expecting the updated Fed outlook to reflect a shallow rate cut cycle.

"[W]hile the Fed will cut next week, the Fed's consensus (median) will be to tilt the outlook in a more hawkish direction than in September or November," Bank of America analysts noted in a recent report.

An upside surprise in U.S. CPI, a measure of inflation, due Wednesday could provide weaken the dollar, but the impact will likely be temporary.  

"While a negative surprise in U.S. CPI data this week could initially weaken the dollar, the analysts note that EUR/USD has shown the lowest correlation to U.S. CPI surprises in this cycle," the strategists said. 

As well as a hawkish tilt from the Fed next week on rate outlook, the EUR/USD is likely to come added pressure from the potential tariff headlines as President-elect Donald Trump officially takes the presidential reins next month.