Euro to USD in 2026: Major Divergence - Central Bank Policy Differences Spark Forecast Disputes

In 2025, the euro performed remarkably well, with a cumulative increase of 14% against the US dollar. As we enter 2026, market outlooks for the euro’s prospects have shown a clear divergence—some institutions are bullish toward 1.25, while others are bearish toward 1.12, with a forecast range exceeding 10%. What is behind this battle of predictions?

Divergence in Central Bank Policies Is the Key Driver

The policy expectations of European and American central banks are becoming the most significant variables influencing the euro-dollar exchange rate.

The European Central Bank’s policy stance has largely been determined. Against the backdrop of resilient European economic data and stable inflation, the market believes the ECB has ended its rate-cutting cycle. Citibank forecasts that the ECB’s interest rate will remain at 2% until the end of 2027.

In contrast, the Federal Reserve’s outlook is the opposite. The market generally expects the Fed to continue cutting rates in 2026, but predictions for the magnitude of rate cuts vary. Goldman Sachs, Morgan Stanley, and Bank of America forecast a 50 basis point cut (two rate cuts), while J.P. Morgan and Deutsche Bank estimate only a 25 basis point cut (one rate cut).

This divergence in central bank policies—hawkish ECB versus dovish Fed—is the core engine driving the fluctuations in the euro.

Economic Fundamentals Determine Long-Term Trends

Besides central bank policies, the relative performance of the European and US economies will also profoundly impact exchange rate movements.

The European economic outlook is mixed. Large-scale fiscal stimulus in Germany is expected to support economic growth, but political risks in France remain, potentially dragging down overall performance.

The US economy also faces uncertainties. US banks and Goldman Sachs predict robust growth in 2026, but Moody’s has issued warnings— the US labor market has already stagnated, and once the boost from artificial intelligence diminishes, the US economy could face significant pressure.

Institutional Forecasts: Bullish vs Bearish

Based on the above factors, Wall Street institutions have shown a stark divergence in their outlooks for the euro against the dollar in 2026.

Bullish Camp:

J.P. Morgan believes that European economic growth and Germany’s fiscal expansion will support a moderate rise in the euro, reaching 1.20 by Q2 2026. If US economic data weaken, the euro could rise to 1.25 against the dollar.

Deutsche Bank’s forecast is even more optimistic. The bank states that the euro will break above 1.20 in mid-2026, driven by Germany-led eurozone growth and the potential for a peace agreement in the Russia-Ukraine conflict, reaching 1.25 by year-end.

Bank of America also shares a bullish view on the euro.

Bearish Camp:

Standard Chartered issues a risk warning. The bank notes that if Germany’s fiscal stimulus fails to revive the economy as expected, the ECB may be forced to cut rates to offset external headwinds. Standard Chartered predicts the euro will fall to 1.13 in mid-2026 and further decline to 1.12 by year-end.

Barclays shares a similarly pessimistic view. Given the significant deterioration in eurozone trade conditions, the bank believes growth and inflation levels are both at risk of downside surprises. Barclays forecasts the euro will fall to 1.13 by the end of the year.

Citibank also joins the bearish camp.

Mixed Outlook:

Morgan Stanley presents a “rise first, then fall” forecast. The bank believes that in the first half of 2026, the US-Europe interest rate differential will narrow due to Fed rate cuts, pushing the euro to 1.23, and in a bullish scenario, possibly approaching 1.30. However, in the second half, as European fundamentals weaken and the US economy demonstrates resilience, the euro will ultimately retreat to 1.16 by year-end.

Summary

The performance of the euro against the dollar in 2026 will depend on whether three key factors unfold as expected: the pace of Fed rate cuts, whether Europe’s economy can accelerate with fiscal stimulus, and whether US economic resilience persists. The market’s divided forecasts reflect the high uncertainty surrounding these factors.