AUD Strength Forecast: Bank of America Predicts Sustained Momentum as EUR/AUD Faces Further Decline

The Australian dollar (AUD) has long been a barometer for global risk appetite and commodity-driven economic cycles. Yet, as 2026 approaches, a compelling case is emerging for contrarian positioning in the AUD, driven by diverging central bank policies and deteriorating dynamics in the EUR/AUD cross. While Bank of America (BofA) maintains a bearish outlook for the AUD in 2025, the broader macroeconomic landscape suggests that the currency may be undervalued relative to its fundamentals, particularly against the euro.

Diverging Policy Paths: RBA vs. ECB

The Reserve Bank of Australia (RBA) has adopted a hawkish stance to combat persistent inflation, with core CPI at 3.2%-well above its 2%-3% target band. This contrasts sharply with the European Central Bank's (ECB) "steady hand" approach, as the Eurozone's headline inflation has stabilized at 2.0%. The RBA's tightening bias, including a potential 25-basis-point rate hike in early 2026, has widened the yield differential between Australia and the Eurozone, pushing the EUR/AUD cross to a 15-month low of 1.7300.

This policy divergence is critical. While the ECB faces no immediate pressure to raise rates, the RBA's focus on curbing services inflation and addressing a tight labor market has positioned the AUD as a relative outperformer. Leading Australian banks, including Commonwealth Bank (CBA) and National Australia Bank (NAB), have echoed this view, forecasting further RBA tightening in early 2026. By contrast, the Eurozone's projected 1.2% GDP growth for 2026 suggests limited upside for the euro, reinforcing the EUR/AUD pair's bearish bias.

EUR/AUD Dynamics and Positioning Imbalances

The EUR/AUD cross has become a focal point for contrarian investors. BofA's bearish forecast for the AUD-pegging the currency at 0.63 for Q1 2026- overlooks the structural weaknesses in the euro's fundamentals. The euro's recent stability near 1.1600 is largely a function of a weaker U.S. dollar, not robust Eurozone growth. Meanwhile, the AUD's resilience is supported by Australia's strong household spending and a labor market normalizing toward the RBA's natural rate of employment.

CFTC positioning data for December 2025 further highlights imbalances in the EUR/AUD cross. Large speculators have pushed net-long exposure to the euro to an 18-month high, signaling overbought conditions in EUR/USD. Conversely, net-short exposure to the AUD remains entrenched, with both large speculators and asset managers holding diminishing but still bearish positions in AUD/USD. These extremes suggest a potential reversal in risk-on sentiment, which could favor the AUD as positioning unwinds.

Contrarian Case for the AUD

While BofA and others caution against AUD strength, the currency's fundamentals and positioning dynamics present a compelling contrarian opportunity. Australia's energy market, though weak, is offset by robust consumer confidence and a policy environment that prioritizes inflation control. The RBA's elevated interest rates, combined with the ECB's dovish neutrality, create a tailwind for the AUD against the euro.

Moreover, the EUR/AUD cross is vulnerable to further declines as global risk sentiment shifts. The AUD's strong correlation with the S&P 500 and metals prices positions it to benefit from a rebound in cyclical assets, while the euro's reliance on fragile Eurozone growth limits its upside. BofA's broader 2026 forecast-highlighting synchronized central bank easing and AI-driven economic growth-also implies a more accommodative environment for the AUD, particularly if the U.S. dollar weakens.

Conclusion

The AUD's bearish consensus, led by BofA, underestimates the structural forces at play. Diverging central bank policies, overbought positioning in the euro, and Australia's resilient domestic economy create a favorable setup for the AUD to outperform in 2026. For investors seeking contrarian exposure, the EUR/AUD cross offers a high-conviction trade, with further declines likely as policy differentials widen and positioning extremes correct.