Investing.com — The trajectory of U.S. inflation and the prospects for European Union reform will be the two most critical factors shaping markets in 2025, Bank of America analysts said.
BofA said getting U.S. inflation right is the “most important market call,” given the mixed inflationary implications of the new administration’s policy agenda. While the market appears optimistic about pro-growth “Trump trades,” it paradoxically expects low inflation, a stance brokerage called inconsistent.
The bank’s baseline scenario assumes U.S. inflation will remain contained, allowing the dollar to peak early in the year before weakening. However, a scenario of higher inflation could force the Federal Reserve into aggressive rate hikes, risking a hard landing, or lead to concerns about deteriorating debt dynamics.
On Europe, brokerage argued that markets are overly pessimistic, with low expectations for economic reforms or coordinated responses to U.S. policy challenges. Potential catalysts for positive surprises include increased fiscal spending in Germany, progress on EU reforms, and geopolitical stability.
Risks for the euro are seen as “asymmetrically positive” beyond the short term, given the low bar for optimism, BofA added.
