EUR/USD in 2026: A Tale of Two Central Banks and Where 100 Euros in USD Really Goes

2026-01-04 12:58:12

The euro’s 2026 trajectory hinges on a simple but critical question: can Europe’s growth hold steady while the Fed keeps cutting rates? If yes, EUR/USD climbs above 1.20. If Europe stumbles, the pair could slide back to 1.13—or even break lower toward 1.10. That spread matters because it determines what 100 euros in USD is actually worth next year.

The ECB Digs In While the Fed Keeps Cutting

The policy divergence is stark. The Federal Reserve already delivered three rate cuts in 2025, bringing the federal funds rate down to 3.5%–3.75%. The European Central Bank? It’s been on pause since July, holding its benchmark rate at 2.15%.

That gap is widening the rate differential, and Jerome Powell’s impending exit (his term ends May 2026) is adding fuel to the story. Trump has made clear he wants a more aggressive Fed chair, one willing to cut faster than Powell has. Markets are pricing in multiple cuts for 2026—Goldman Sachs, Morgan Stanley, and other major banks expect at least two cuts, taking the Fed to 3.00%–3.25%.

Meanwhile, the ECB? President Christine Lagarde just declared monetary policy is in a “good place,” which is essentially central banker code for: we’re not moving anytime soon. Most economists polled by Reuters expect the ECB to keep rates flat through 2026 and 2027.

Eurozone Growth Is Limping, But Not Dead

Here’s where it gets tricky. The Eurozone’s economy is growing, but barely. The latest Commission forecasts see 1.3% growth in 2025, dropping slightly to 1.2% in 2026, then recovering to 1.4% in 2027. Not exactly roaring.

Germany’s auto sector took a hit—output fell 5% due to the EV transition and supply chain chaos. Europe’s underinvestment in innovation is also showing, with key tech segments lagging the US and China. Add in Trump’s “reciprocal tariff” threat (10%–20% on EU goods), and EU exports to the US are reportedly down 3%, with autos and chemicals bearing the brunt.

That said, it’s not a recession. Q3 saw the Eurozone expand 0.2%, with Spain and France posting 0.6% and 0.5% respectively. Germany and Italy flatlined, but the bloc held.

Inflation Isn’t Cooperating

This is why the ECB isn’t rushing to cut. Eurozone inflation sat at 2.2% year-on-year in November—above the ECB’s 2.0% target. More worrying: services inflation accelerated to 3.5%, up from 3.4%. Services inflation is the sticky kind, the type central banks dread seeing re-ignite.

That gives the ECB cover to stay put in 2026. With inflation still floating above target and growth just muddling along, there’s no urgent case for cuts and no case for hikes either.

The EUR/USD Scenarios for 2026

This brings us back to the euro’s direction. The market is weighing two main tracks:

Scenario 1: Europe Holds, Fed Cuts If Eurozone growth stays above 1.3% and inflation creeps down slowly, the ECB likely holds rates steady. The Fed, meanwhile, keeps cutting. The rate gap narrows but in a way that actually supports the euro—because it suggests the US economy is loosening policy while Europe is stable, not weak. In this case, EUR/USD could rise toward 1.20. UBS Global Wealth Management is leaning this way, expecting 1.20 by mid-2026.

Scenario 2: Europe Slides, ECB Breaks If Eurozone growth disappoints (below 1.3%) and trade shocks bite harder, the ECB might capitulate and start cutting to support activity. That would interrupt the euro’s recent upside and pull EUR/USD back toward the 1.13 support level—potentially even 1.10.

Bank Forecasts Show the Spread

Citi expects a weaker euro, projecting EUR/USD at 1.10 by Q3 2026. Their thesis: US growth re-accelerates and the Fed cuts less than currently priced. From today’s 1.1650, that’s roughly a 6% drop.
UBS sees upside, targeting 1.20 by mid-2026, betting on a narrowing rate gap that favors the euro.
Goldman Sachs, Morgan Stanley, Bank of America, Wells Fargo, Nomura, and Barclays broadly expect two Fed cuts in 2026, with Goldman placing them in March and June, and Nomura in June and September.

The Bottom Line: It’s a Balancing Act

EUR/USD in 2026 comes down to narrative as much as numbers. If the Fed keeps cutting while Europe muddles through without collapsing, the euro has room to rise—and 100 euros in USD becomes worth more. If Europe gets blindsided by growth weakness or tariff shock, and the ECB is forced to loosen, that upside gets capped fast. The 1.13 zone becomes real support; 1.10 becomes a live level.

The rate differential matters, but so does why it’s changing. The market will trade the story as much as the basis points.

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