2026 EUR/USD and Euro to CAD Forecast: Fed Cuts, ECB Inaction, and What Comes Next

The currency market’s biggest question in 2026 isn’t whether central banks will move—it’s which ones will, and how aggressively. The Federal Reserve has already cut three times in 2025 and signals more easing ahead. The ECB, meanwhile, remains locked in pause mode. This divergence will be the primary driver of EUR/USD trajectory, with potential spillover effects on euro to CAD forecast and broader currency dynamics.

The Fed’s Easing Engine Is Running, and 2026 Could See More

The US Federal Reserve wrapped 2025 with three rate cuts—exceeding its prior guidance of two. After holding steady at 4.5% through the first half (partly due to tariff inflation concerns), the Fed pivoted in September, delivering 25 basis points of cuts in that month, followed by two additional moves in October and December. The federal funds target now sits at 3.5%–3.75%.

The political dimension adds an extra layer of intrigue. Jerome Powell’s term expires in May 2026, and market consensus suggests he won’t be reappointed. Trump has openly criticized Powell for moving too cautiously on rate reductions and has signaled that his successor would pursue a more dovish path. The incoming administration appears focused on selecting a Fed chair aligned with faster easing.

Major financial institutions are aligned on the probability of further cuts. Goldman Sachs, Morgan Stanley, Bank of America, Wells Fargo, Nomura, and Barclays all project two cuts in 2026, bringing the federal funds range toward 3.00%–3.25%. Moody’s Chief Economist Mark Zandi echoes this view, though he frames it differently: not because US growth is booming, but because the economy sits in a precarious “delicate balance.” Under such conditions, rate cuts become supportive rather than stimulative.

The ECB’s Holding Pattern: Growth Concerns Meet Sticky Inflation

In stark contrast, the European Central Bank appears unlikely to shift policy significantly in 2026. The ECB held all three key rates unchanged in December, maintaining the deposit rate at 2.00%, the main refinancing rate at 2.15%, and the marginal lending facility at 2.40%. President Christine Lagarde’s post-meeting remarks signaled satisfaction with the current stance, describing policy as being in a “good place”—ECB-speak for “no rush to act.”

Inflation presents a mixed picture that justifies the ECB’s caution. Eurostat data shows inflation at 2.2% year-on-year in November, ticking above the ECB’s 2.0% target. More concerning is the composition: energy prices have eased, but services inflation—the sticky component central banks monitor closely—has risen to 3.5%. This is precisely the type of price pressure that makes rate cuts politically difficult.

On the growth front, Eurozone expansion remains tepid. The European Commission’s autumn projections see GDP growth of 1.3% in 2025, dropping to 1.2% in 2026, and recovering only modestly to 1.4% in 2027. Q3 data revealed a 0.2% quarterly expansion for the bloc as a whole, with uneven distribution: Spain and France posted 0.6% and 0.5% respectively, while Germany and Italy stalled. Germany’s auto sector—battered by the EV transition and supply-chain pressures—has seen output fall 5%.

Trade policy adds another headwind. The Trump administration’s “reciprocal tariff” framework has raised the prospect of 10%–20% tariffs on EU goods. Early estimates suggest EU exports to the US could decline 3%, with autos and chemicals bearing the brunt. This external demand shock could intensify growth worries if it materializes.

Market consensus, reflected in a Reuters poll, expects the ECB to hold rates through 2026 and into 2027, though confidence wavers sharply beyond that timeframe. Economists like Christian Kopf (Union Investment) don’t see near-term movement; should anything change, late 2026 or early 2027 is more likely, and a hike rather than a cut is the presumed direction if conditions warrant.

The Rate Gap Widens: What EUR/USD Does Next

The EUR/USD outlook hinges on a simple mechanism: as the Fed cuts and the ECB holds, the US-Europe yield differential narrows. Historically, a narrowing rate gap has supported the euro. But currency markets trade narratives as much as numbers, and the reason why the gap moves matters as much as the magnitude.

Two scenarios dominate the debate:

Scenario 1 – Europe Holds Up: If Eurozone growth stays above 1.3% and inflation edges higher gradually, the ECB likely maintains its current stance. The Fed continues cutting into 2026. The yield gap narrows, supporting the euro. Under this path, EUR/USD could probe above 1.20.

Scenario 2 – Europe Stumbles: If Eurozone growth disappoints (falling below 1.3%), and external shocks (tariffs, trade friction) intensify the slowdown, the ECB may feel compelled to ease policy to support activity. This would flip the dynamic: instead of a yield-gap tightening that supports the euro, you’d see outright ECB cuts that weaken it. In this case, EUR/USD would likely retreat toward 1.13 support, with 1.10 as a potential downside target if the decline accelerates.

Major institutions offer divergent forecasts, reflecting different assumptions:

Citi’s Bearish View: Citi projects EUR/USD falling to 1.10 in 2026, predicting a Q3 bottom near that level—roughly a 6% decline from current 1.1650 levels. The thesis: US growth re-accelerates while the Fed cuts less than markets currently price in, extending the period of relative dollar strength.

UBS’s Bullish View: UBS Global Wealth Management (via EMEA CIO Themis Themistocleous) takes the inverse position. If the ECB remains on hold while the Fed cuts substantively, the yield gap indeed narrows, and that supports euro appreciation. UBS expects EUR/USD to climb toward 1.20 by mid-2026.

Implications for Euro to CAD Forecast and Broader FX Dynamics

The EUR/USD trajectory will ripple across currency pairs, including euro to CAD. The Canadian dollar, as a commodity-linked currency, remains sensitive to risk sentiment and US growth expectations. A stronger euro (in the 1.20 scenario) would likely accompany broader risk appetite, potentially weakening the Canadian dollar. Conversely, a weaker euro (in the 1.10 scenario) typically emerges during risk-off periods when safe havens like the Canadian dollar may benefit.

In 2026, the euro to CAD forecast will depend partly on how EUR/USD trades, but also on Canadian economic data and the Bank of Canada’s policy path. If the BoC also cuts while the ECB holds, the positive carry differential could support the Canadian dollar relative to the euro, pushing the euro to CAD pair lower. If growth surprises on the upside, narrowing both central banks’ easing expectations, the pair could stabilize or move higher.

The Bottom Line

The euro’s 2026 trajectory is fundamentally a bet on two things: whether European growth proves resilient enough to keep the ECB on the sidelines, and whether the Fed’s easing path matches market expectations. The rate differential provides the mechanical framework, but the story beneath matters more. If “Fed cuts + ECB holds + Europe muddlers through” is the narrative, EUR/USD has room to appreciate toward and beyond 1.20. If “trade shocks + growth disappointment + ECB pivots to easing” dominates headlines, then 1.13 and 1.10 stop being worst-case scenarios and become base cases instead.