Euro 2026 Outlook: Divergence in US and European Monetary Policies, Still Room for Appreciation

In 2025, with increasing bets on interest rate cuts by the Federal Reserve, reduced expectations for interest rate cuts by the European Central Bank, and a wave of de-dollarization, the euro against the US dollar (EUR/USD) rose a cumulative 14%. 【Source: TradingView; EUR/USD trend in 2025】 Looking ahead to 2026, analysts point out that changes in monetary policy expectations of the US and European central banks and the relative performance of the US and European economies are key factors affecting the EUR/USD trend. US and European Central Bank Monetary Policy With the European economy showing resilience and inflation stabilizing, the market generally believes that the European Central Bank has ended its interest rate cut cycle. Citigroup predicts that the European Central Bank will keep interest rates unchanged at 2% until the end of 2027. In contrast to the European Central Bank, the market generally believes that the Federal Reserve will continue to cut interest rates. Goldman Sachs, Morgan Stanley, and Bank of America predict that the Federal Reserve will cut rates twice in 2026, totaling a 50 basis point cut. JPMorgan Chase and Deutsche Bank predict that the Federal Reserve will only cut rates once by 25 basis points in 2026. Relative Performance of US and European Economies The economic outlook for Europe in 2026 is mixed. Germany's large-scale fiscal stimulus will support economic growth, but political risks in France are expected to drag down the economy. In the US, Bank of America and Goldman Sachs predict strong economic growth in 2026. However, Moody's rating agency indicates that the US job market is stagnating, and once the boost from artificial intelligence weakens, the US economy will face significant troubles. What will be the future trend of the EUR/USD? JPMorgan Chase, Bank of America, and Deutsche Bank are bullish on the euro. JPMorgan Chase states that European economic growth and Germany's fiscal expansion will support a moderate rise in the euro, predicting that EUR/USD will reach 1.20 in the second quarter of 2026. If US economic data is weak, EUR/USD could rise to 1.25. Deutsche Bank also believes that Germany leading the eurozone's economic rise, along with potential peace agreements in the Russia-Ukraine conflict, will push EUR/USD to break through 1.20 in mid-2026 and reach 1.25 by the end of 2026. However, Standard Chartered Bank, Barclays Bank, and Citigroup are bearish on the euro. Standard Chartered Bank points out that if Germany's fiscal stimulus fails to drive economic recovery as expected, the European Central Bank may be forced to cut rates to offset external growth headwinds. They predict that EUR/USD will fall to 1.13 by mid-2026 and to 1.12 by the end of 2026 Barclays Bank stated that given the significant deterioration in trade conditions in the Eurozone, the already high growth expectations and inflation levels face particularly prominent downside risks. It predicts that the euro will fall to 1.13 against the US dollar by the end of 2026. Morgan Stanley, on the other hand, believes that the euro exchange rate will rise first and then fall in 2026. Against the backdrop of the Federal Reserve's interest rate cuts, the narrowing of the interest rate differential between the US and Europe in the first half of 2026 will support the euro to rise to 1.23 against the US dollar, and in a bullish scenario, it may even rise to 1.30. However, in the second half of the year, due to the re-emergence of weak fundamentals in Europe and the resilience of the US economy, the euro will fall to 1.16 against the US dollar by the end of the year