2026 EUR/USD Outlook: ECB Inaction Meets Fed Dovishness—What Comes Next

The euro’s trajectory through 2026 hinges on a widening policy divergence: a Federal Reserve actively cutting rates versus a European Central Bank that appears content to hold ground. That rate gap—and how markets interpret the underlying narratives—will determine whether EUR/USD rallies toward 1.20 or retreats to 1.13 and below.

The ECB Is Taking a Patient Stance While Inflation Lingers

The European Central Bank has held firm since July, keeping its main refinancing rate anchored at 2.15%. That deliberate pause reflects a nuanced backdrop: Eurozone growth remains tepid, yet inflation refuses to cooperate cleanly.

Eurostat’s latest data showed headline inflation at 2.2% year-on-year in November, creeping above the ECB’s 2% target. Services inflation—the stubborn component—ticked up to 3.5% from 3.4% the prior month. That’s precisely the kind of persistence that makes central banks nervous about cutting too aggressively.

ECB President Christine Lagarde signaled in December that policy is in a “good place,” effectively ruling out urgency in either direction. Market consensus aligns: a Reuters poll found most economists expect rates to remain unchanged through 2026, with 2027 forecasts scattered across a wide 1.5%–2.5% range—a telltale sign conviction weakens further out.

European Growth: Slow but Not Broken

The Eurozone’s economic picture is mixed. Q3 expansion clocked in at 0.2%, though Spain and France outpaced this with 0.6% and 0.5% respectively, while Germany and Italy stalled. The European Commission’s latest projection pencils in 1.3% growth for 2025 (revised up), 1.2% for 2026 (trimmed down), and 1.4% for 2027—a subtle nod that 2026 could be choppier than consensus wants to admit.

Structural headwinds are real. Germany’s auto sector, buffeted by the EV transition and supply disruptions, saw output contract 5%. Meanwhile, underinvestment has left swaths of Europe trailing the US and China in critical tech sectors. Trade risks are mounting too. The Trump administration’s reciprocal tariff strategy has raised escalation fears, with reported 10%–20% duties on EU goods potentially incoming. Export-dependent economies face particular vulnerability, with projections suggesting US-bound EU shipments could fall 3%, with autos and chemicals absorbing the hardest hits.

Yet the narrative isn’t collapse—it’s sluggish resilience. Growth exists; it’s just not impressive.

The Fed Is in Easing Mode; 2026 Could Deliver More Cuts

Contrast that with the Federal Reserve. Having already cut three times in 2025—exceeding its December 2024 projection of two—the Fed moved its target range to 3.5%–3.75%. A March hold reflected tariff-related inflation fears, but cooling disinflation and softening labor markets opened the cutting door in the latter half of the year.

Political dynamics add a wrinkle. Fed Chair Jerome Powell’s term expires in May 2026, and reappointment looks unlikely. Trump has repeatedly faulted Powell for moving too slowly on cuts and has signaled that his Fed chair pick would favor more aggressive easing. The president is expected to name that successor in early January.

Major banks—Goldman Sachs, Morgan Stanley, Bank of America, Wells Fargo, Nomura, and Barclays—are broadly aligned on two additional cuts in 2026, bringing rates to 3.00%–3.25%. Moody’s chief economist Mark Zandi echoes that view, though he frames it as the economy teetering on a “delicate balance” rather than booming. Whether cuts come in March and June (Goldman’s call) or June and September (Nomura’s view), the directional bias is clear: lower.

The Currency Battlefield: Two Competing Narratives

EUR/USD in 2026 essentially boils down to whether Europe can hold its own while the Fed keeps cutting.

The bull case for the euro: If Eurozone growth stays above 1.3% and inflation drifts gradually back to target, the ECB remains seated. That combination of ECB patience and Fed easing narrows the yield spread, potentially pushing EUR/USD above 1.20. UBS Global Wealth Management foresees this path, projecting a move to 1.20 by mid-2026.

The bear case for the euro: Weaker growth (below 1.3%), compounded by trade shocks or persistent inflation, could force the ECB’s hand toward cuts. That scenario likely derails the euro’s 2025 rebound and sends EUR/USD back toward 1.13 or lower. Citi takes this angle, projecting EUR/USD at 1.10 by Q3 2026—roughly a 6% decline from current 1.1650 levels—on the assumption that US growth reaccelerates and the Fed cuts less than markets anticipate.

The reality is that 2026 becomes a test of narrative durability. If “Fed cuts + Europe muddles through” holds, the euro has room to climb. If “Europe slows + tariff shock + ECB eases” becomes the dominant story, upside gets capped fast, and the 1.13–1.10 zone stops looking like theory and starts looking inevitable.