EUR/USD in 2026: What the Rate Gap Really Tells You About the Euro's Path Forward

The euro forecast hinges on a simple divergence: while the Fed is cutting rates and showing signs of further easing into 2026, the ECB remains locked in hold mode. That gap—and how it evolves—will determine whether the euro strengthens toward 1.20 or retreats toward 1.13 (or lower). The question traders are wrestling with isn’t just about numbers, though; it’s about which central bank blinks first and whether Europe’s economy can hold ground.

The Two Scenarios That Matter for EUR/USD

Picture this: if Eurozone growth stays resilient and inflation drifts toward the ECB’s 2% target at a slow pace, rate differentials could favor the euro. That world sends EUR/USD higher, testing 1.20 and beyond. But flip the script—if growth disappoints and the ECB switches to a dovish stance to prop up activity—and the euro gets pulled back. The 1.13 zone becomes a realistic target, with 1.10 not out of reach.

Citi’s base case is more bearish: they’re modeling a dollar surge to 1.10 by Q3 2026, assuming US growth re-accelerates while the Fed cuts less aggressively than consensus expects. That’s roughly a 6% move from current levels. UBS, meanwhile, takes the opposite stance—if rate differentials narrow due to ECB patience and Fed cutting, the yield gap tightens in ways that support the euro, potentially pushing EUR/USD to 1.20 mid-year.

The real driver isn’t abstract; it’s the rate gap and the story behind it.

Eurozone Growth: Sluggish but Surviving

The Eurozone economy is moving, just not fast. The European Commission’s autumn projections show growth expected at 1.3% in 2025 and 1.2% in 2026—a subtle downgrade from earlier estimates that hints at softer momentum ahead. But “sluggish” isn’t “collapsing.” Q3 data delivered 0.2% growth at the bloc level, with France (0.5%) and Spain (0.6%) outpacing laggards Germany and Italy (flat).

Europe’s growth challenges run deeper than cyclical weakness. Germany’s auto sector, squeezed by EV transition pressures and supply-chain friction, saw output drop 5%. Underinvestment in innovation leaves chunks of Europe trailing the US and China in tech. Add rising trade tensions into the mix—the Trump administration’s tariff rhetoric has raised the specter of 10-20% levies on EU goods—and export-dependent economies face real headwinds. EU exports to the US are forecast to fall 3%, with autos and chemicals bearing the brunt.

The euro forecast depends partly on whether Europe can absorb these shocks without a significant slowdown deepening into 2026. Right now, the baseline is “muddle through,” not crisis.

Why Inflation is Keeping the ECB Parked

Here’s the reason the ECB isn’t rushing to cut: inflation is moving the wrong direction. Eurostat’s data showed Eurozone inflation at 2.2% year-on-year in November, creeping above the ECB’s 2% medium-term anchor. Energy prices have eased (down 0.5%), but services inflation—the sticky, wage-driven kind—accelerated to 3.5% from 3.4% month-on-month.

That’s exactly what central banks don’t want to see re-accelerate. Services inflation is hard to reverse without demand destruction, and the ECB knows it. After the December 18 meeting, Christine Lagarde reinforced the hold message, calling policy “in a good place.” The deposit facility rate remains at 2.00%, the main refinancing rate at 2.15%, and the marginal lending facility at 2.40%. Most economists, per Reuters polls, expect the ECB to leave rates untouched through 2026 and 2027. The bar for action either direction remains high.

Outside observers like BNP Paribas’ chief economist Isabelle Mateos y Lago emphasize that this pause isn’t passive—it’s deliberate. The ECB has room to wait because inflation hasn’t definitively collapsed and growth, while weak, isn’t imploding.

The Fed: Three Cuts Down, More Likely in 2026

The Fed delivered three rate cuts in 2025—September, October, and December—bringing the federal funds range down to 3.5%-3.75%. That beat the December 2024 projection of two cuts. March brought a pause due to tariff concerns, but cooling inflation and labor market softness in the second half reopened the door.

Looking ahead to 2026, the consensus among major banks is broad: Goldman Sachs, Morgan Stanley, Bank of America, Wells Fargo, Nomura, and Barclays all expect two cuts, bringing rates to the 3.00%-3.25% zone. Goldman forecasts moves in March and June; Nomura places them in June and September.

Politics adds a wildcard. Jerome Powell’s term ends in May 2026, and he’s not expected to stay. Trump has criticized Powell for moving too slowly and hinted that his successor would push easing faster. That political backdrop—combined with the screening process for the next chair—raises the possibility that Fed policy could tilt more dovish than markets currently price.

Mark Zandi at Moody’s argues that 2026 cuts won’t come from a booming economy; rather, they’ll reflect central bank efforts to maintain a “delicate balance.” In other words, the Fed may cut because growth is fragile, not robust.

What EUR/USD Trading Actually Comes Down To

The euro forecast for 2026 is fundamentally a trade on two diverging paths: ECB patience versus Fed flexibility. Rate differentials matter, but markets trade the why as much as the numbers.

If the Eurozone exhibits resilience above 1.3% growth and inflation edges higher slowly, the ECB holds and EUR/USD probes north of 1.20. Conversely, if growth stumbles and the ECB pivots toward cuts, the euro’s 2025 rebound gets interrupted and 1.13 becomes a magnet—possibly lower.

The euro forecast hinges on that tension. Which scenario plays out will depend on whether Europe’s structural headwinds prove transient or transformative, whether trade shocks accelerate, and ultimately, whether central banks stay their course or adapt to new economic realities in 2026.