Bank of America

An American View of a Currency That Still Cannot Take Off

Bank of America, one of the world’s largest financial institutions, has not changed its view on the euro. It looks at the single European currency with caution bordering on pessimism — not catastrophic or panicked, but rather weary and pragmatic. BofA analysts see too many factors that will weigh on the euro in the coming months, and too few that could support it.

The euro is going through a difficult period. It is not collapsing, but it is not rising either. It is moving sideways around 1.16–1.17 against the dollar, sometimes slightly higher, sometimes slightly lower. Investors who just a year ago believed in a quick return to 1.20 and above are now simply hoping it will not fall to 1.10.

BofA offers no false hopes. Its analysts believe pressure on the euro will persist at least through the second and third quarters. Only toward the end of the year, if energy markets begin to normalize and eurozone growth improves, may the single currency have a chance to recover.

But what exactly is holding the euro back? Why can a currency serving an economy of 450 million people and GDP of 15 trillion euros not strengthen against the dollar? The answers lie in three areas: energy, economic growth, and geopolitics.

Europe’s Energy Curse

The first and perhaps main reason for the euro’s weakness is Europe’s energy vulnerability. BofA says directly: Europe remains more vulnerable to rising energy costs than the United States. This is not new, but under current conditions this vulnerability is becoming critical.

Natural gas prices have historically had a much stronger impact on the eurozone economy. European industry, especially Germany’s, was built on cheap Russian gas. After the start of the war in Ukraine and the...

In recent years, the British pound has often looked like a currency adrift. Brexit, political turmoil, scandals involving prime ministers, inflation shocks, and the Iran crisis have all weighed on sterling from different directions. Yet beneath the surface of this turbulence, largely unnoticed by newspaper headlines, a structural shift has been taking place. According to Bank of America strategist Kamal Sharma, this shift could become a long-term pillar of support for the pound. The shift has a name: a transformation in the quality of foreign direct investment (FDI).

From Mergers and Acquisitions to Laboratories and Factories

For decades, sterling was highly sensitive to global mergers and acquisitions (M&A) cycles. When international corporations acquired British companies, billions of dollars flowed into the country, strengthening the pound. When M&A activity slowed, the currency weakened. This created a chronic dependence on short-term, volatile capital flows. A deal closed, money arrived. No deals, no money. The pound effectively danced to the tune of Wall Street investment bankers.

Now, according to EY data cited by Bank of America, the nature of investment flows is changing. The UK is gradually moving away from its dependence on mergers and acquisitions. Instead, it is attracting investment into new production facilities and research and development (R&D). Capital is no longer being used primarily to purchase existing assets but to create new ones. This represents a fundamentally different quality of investment.

Sharma points to specific sectors: artificial intelligence, biotechnology, and advanced manufacturing. These are knowledge-intensive industries that create high-paying jobs, generate intellectual property, and improve economic productivity. When Google or Microsoft opens a research center in Cambridge, when a pharmaceutical giant builds a laboratory in Oxford, or when a semiconductor manufacturer establishes a plant in Scotland, it is not merely a one-off capital inflow. It is the creation of long-term...