The 2026 Euro to USD trend diverges: the policy watershed between the US and Europe, who is bullish and who is bearish?

In 2025, the euro against the US dollar surged by 14%, but Wall Street’s forecasts for the dollar’s trend in 2026 are divided into two camps—some are bullish, targeting 1.25, while others are bearish, expecting it to fall to 1.12. What is the core logic behind this divergence?

Key Divergence in US and European Central Bank Policies

The European Central Bank has already sat down. In an environment where Europe’s economic resilience remains intact and inflation is gradually receding, the market consensus believes that the ECB’s rate-cut cycle has ended. Citibank predicts the ECB will keep interest rates fixed at 2% until the end of 2027.

Meanwhile, the Federal Reserve continues to loosen monetary policy. Major investment banks differ on the pace of Fed rate cuts in 2026, but all agree cuts will happen. Goldman Sachs, Morgan Stanley, and Bank of America forecast two rate cuts totaling 50 basis points in 2026, while J.P. Morgan and Deutsche Bank are more conservative, expecting only one cut of 25 basis points.

This creates a classic interest rate differential game: European rates remain high, US rates continue to decline, narrowing the US-Europe interest rate gap, which increases upward pressure on the euro.

Economic Fundamentals: Germany as the Key Variable

Will Europe’s economy strengthen in 2026? The key depends on Germany. If the German government’s large-scale fiscal stimulus materializes, it could become the main driver of European economic growth. However, political risks in France still loom, potentially dragging down overall performance.

What about the US economy? Opinions vary here as well. Bank of America and Goldman Sachs are optimistic about US growth in 2026, but Moody’s ratings are more cautious—pointing out that the US labor market is stagnating, and once the AI dividend fades, the economy could slow down.

Institutional Forecasts Clash: Optimists vs Pessimists

Bullish Camp: Target Range 1.20-1.25

J.P. Morgan believes that Germany’s fiscal expansion and Europe’s economic growth will support a moderate rise in the euro, expecting it to break above 1.20 in Q2 2026, and possibly reach 1.25 if US data remains weak.

Deutsche Bank is also optimistic, citing Germany’s leadership in the eurozone recovery and potential peace agreements in the Russia-Ukraine conflict as positive factors. The euro against the dollar could break 1.20 by mid-2026 and approach 1.25 by year-end.

Morgan Stanley’s logic is a “rise first, then fall” scenario—narrowing US-Europe interest rate spreads in the first half push the euro to 1.23, and in a bullish scenario, it could hit 1.30. However, as Europe’s fundamentals weaken and US resilience becomes evident in the second half, the euro is expected to fall back to 1.16 by year-end.

Bearish Camp: Target Range 1.12-1.13

Standard Chartered offers a cautious outlook: if Germany’s fiscal stimulus fails to effectively boost the economy, the ECB may be forced to follow suit and cut rates to counter external shocks, which would depress the euro. They forecast the euro to dip to 1.13 in mid-2026 and further decline to 1.12 by year-end.

Barclays also remains bearish, mainly concerned about a significant deterioration in trade conditions in the eurozone, with already high growth expectations and inflation levels facing downside risks. They expect the euro to fall to 1.13 by year-end.

The Core Contradiction in USD Trend Forecasts

The optimistic camp bets on a low risk of a hard landing for Europe’s economy and limited room for Fed rate cuts; the pessimistic camp bets on Europe being unable to break out and US economic resilience exceeding expectations.

Whether the euro in 2026 breaks above 1.25 or drops to 1.12 may ultimately depend on three variables: the effectiveness of German fiscal stimulus, US employment data, and the Russia-Ukraine situation.