EUR/USD 2026-2027: Between Interest Rate Adjustment and Political Uncertainties – What Traders Should Expect

The EUR/USD currency pair experienced a remarkable rally in 2025. From the January low of 1.02 to the September high of 1.19 – an appreciation of over 16%. But the question remains provocative: Will this trend continue in the coming years, or is a consolidation looming? The answer is more nuanced than many expect.

Three possible scenarios for EUR/USD

Base scenario: Sideways movement between 1.10 and 1.20

The most likely scenario points to a range. The interest rate divergence between the Fed and the ECB acts as support – a lower boundary of 1.10-1.12 is emerging. At the same time, European issues limit upside potential to 1.18-1.20. Germany will deliver mixed results: The investment fund will be partially effective but also fizzle out in several areas. The US avoids a recession but grows only moderately (1.8-2.2%). This scenario is characterized by regular buy and sell signals at the range boundaries.

Pessimistic scenario: EUR/USD falls to 1.05-1.10

A significant risk lies in Germany’s political landscape. If the 2026 state elections significantly strengthen the AfD, the government coalition could become dysfunctional. Infrastructure stimulus would then stall. Simultaneously: France’s budget crisis worsens, and the ECB must cut interest rates. In the same timeframe, the US surprises positively – AI productivity gains drive growth, inflation falls to 2%, and the Fed pauses at 3.50%. Result: EUR/USD drops to 1.08-1.10, with the 1.05 level within reach.

Bullish scenario: Euro climbs to 1.22-1.28

Counter scenario: Germany stabilizes, the stimulus flows out quickly, France’s situation eases, and the Eurozone’s GDP growth reaches 2% – transformative for the region. The ECB could announce interest rate hikes for 2027 by the end of 2026. Meanwhile, a US crisis intensifies: persistent inflation, weak labor market, stagflation tendencies. Trump’s attacks on the Fed intensify. International investors reduce US positions. EUR/USD breaks above 1.20 and moves into the 1.22-1.28 zone.

The fundamental pillar: interest rate divergence between Fed and ECB

The strongest argument for the euro’s appreciation is monetary policy alignment. The Federal Reserve has already cut by 50 basis points in 2025 and signals further cuts to 3.4% by the end of 2026. Meanwhile, the ECB has completed its cycle – the deposit rate has remained at 2.0% since June.

The mechanics are classic: the closer the interest rate gap shrinks, the greater the pressure for currency adjustment. Historically, a narrowing of 100 basis points leads to a 5-8% appreciation. This would push EUR/USD from the current 1.16 to 1.22-1.25. Some analysts even speculate that the ECB could raise rates again in 2027 before the Fed – if the German stimulus proves strong enough – amplifying the effect.

Trump 2.0 and the US: strength with shadows

The second Trump administration has delivered a mixed but generally positive record for the US economy. GDP growth hit a strong 3.8% in Q2 2025, driven by massive AI investments.

Tariff strategy and investment commitments

“Liberation Day” on April 2 announced tariffs up to 145% – a classic Trump negotiation pattern. After 90 days, a compromise followed: average tariffs are now 15-18%, higher than before but not extreme. In exchange, the US government secured investment commitments worth billions from other countries – including trade agreements with the EU and Japan. Result: Massive investments in the US for chip manufacturing (TSMC: 165 billion, Samsung: 44 billion, Intel: 20 billion).

Tax reform and growth drivers

The “One Big Beautiful Bill Act” of July 4 made the 2017 tax cuts permanent. Corporate taxes at 21%, combined with low energy costs, create a magnet for capital. The problem: US debt levels are rising. The deficit will reach about 6% of GDP in 2026. Trump’s attacks on Fed independence undermine international investor confidence – hence the dollar lost over 10% against the euro in 2025.

Germany: The 500-billion package under pressure

The German infrastructure fund over 12 years is celebrated as a game-changer for the Eurozone. But reality could be less spectacular.

Energy costs remain a stumbling block

German electricity prices are 30-35 cents/kWh for households, 15-20 cents/kWh for industry – two to three times higher than in the US. Even with industrial electricity prices of 5 cents/kWh (2026-2028), energy-intensive sectors (Chemicals, Steel, Semiconductors) remain structurally unattractive. An infrastructure stimulus does not lower these costs, so already relocated companies will not return.

Implementation delays

German infrastructure projects take on average 17 years from planning to completion (13 years just for permits). The construction industry reports 250,000 open positions. Efficiency losses are significant – the expected multipliers could be much smaller.

Defense procurement and political risks

Part of defense spending flows abroad (F-35, Patriot, Chinook) – thus stimulating the US more. The 2026 state elections cast their shadow: polls show the AfD at nearly 25% nationwide. A political crisis could significantly delay the implementation of the stimulus and widen the risk premiums on German government bonds.

Eurozone: France as a weak spot

France’s political instability remains a risk factor. A government collapsed in October 2025 within 24 hours. The deficit is around 6% of GDP, and the debt ratio is 113%. French government bonds now yield higher than Spanish – a clear warning sign.

The Eurozone grew only 0.2% in Q3 2025 compared to the previous quarter (Annualized 1.3%), far behind the US (annualized 3.8% in Q2). For 2026, only 1.5% growth is expected. The bright spot: inflation at 2.0% (ECB target), unemployment at 6.3%.

But the ECB could face a dilemma. If the German stimulus fully materializes, inflation could pick up – the ECB would have to raise rates. But this is not in the interest of highly indebted countries, which could lead to a fragmentation crisis.

Bank forecasts: consensus for appreciation, then divergence

End of 2026:

• Morgan Stanley, BNP Paribas, Goldman Sachs: 1.25
• RBC Capital Markets: 1.24
• JP Morgan, ING: 1.22–1.25
• Commerzbank: 1.20
• Wells Fargo: 1.18–1.20

End of 2027:

• Deutsche Bank: 1.30
• Morgan Stanley: 1.27
• RBC Capital Markets: 1.24
• Commerzbank: 1.22
• Wells Fargo: 1.12

The consensus is bullish, with Wells Fargo as an outlier. Arguments for appreciation: interest rate divergence, overvalued dollar, capital flow reversal, German stimulus. Arguments for depreciation: end of Fed cuts, US upswing, Europe’s lack of attractiveness.

Technical position and trading anchor points

EUR/USD finds key support at 1.1550 and 1.1470. A fall below 1.15 would challenge the bullish narrative and could open room for 1.10-1.12. On the upside, the zone 1.1800-1.1920 acts as resistance – a sustained breakthrough above 1.20 could pave the way to 1.22-1.25.

Key risks for 2026-2027

Germany risks underestimated: The strength of the AfD and potential government crisis are not just hypothetical scenarios.

Geopolitical shocks: An escalation in Ukraine or a second energy crisis could trigger massive dollar inflows.

US resilience: The AI boom could bring 2-3% annual productivity gains – a structural advantage through low taxes, cheap energy, and technological dominance.

Conclusion: Volatility with downside risks

The EUR/USD pair in 2026-2027 is caught between opposing forces. The interest rate divergence creates a lower bound at 1.10-1.12, the dollar is overvalued by 23%, and capital flow reversal supports this. At the same time, risks loom: Germany’s political fragmentation (2026), structurally high European energy costs, US economic strength.

The key question will be: Will Germany establish political stability after the 2026 state elections? Will the stimulus work despite structural hurdles? Will the US economy remain resilient? The answers will determine whether we see a new euro strength – or whether the Dollar reclaims its dominance impressively.