USD and EUR 2026 Big Guess: Diverging Central Bank Policies Spark Expectation Divides

A particularly interesting phenomenon since 2025 is that the euro against the US dollar has appreciated by 14% cumulatively. What is driving this? The Federal Reserve has been forced to consider rate cuts, while the European Central Bank has called a halt. This contrast in monetary policies has directly ignited market imagination in the forex space. As we enter 2026, how will the dialogue between the US dollar and the euro unfold?

Central Bank Stances Determine Exchange Rate Trends

Wall Street’s forecasts are divided into two camps: one believes the Federal Reserve will cut rates multiple times throughout the year, while the other is more conservative.

The Fed’s direction is the most uncertain: Goldman Sachs, Morgan Stanley, and Bank of America generally expect the Fed to cut rates twice in 2026, totaling 50 basis points; however, J.P. Morgan and Deutsche Bank are more cautious, expecting only one rate cut of 25 basis points. Regardless, the rate cut arrow is already on the bow.

The European Central Bank, on the other hand, remains on hold: Against the backdrop of gradually stabilizing inflation and economic resilience in Europe, Citibank predicts the ECB will keep rates at 2% until the end of 2027. This means the US-EU interest rate differential will continue to narrow, which is undoubtedly positive for the euro.

Economic Performance Is the Ultimate Decider

But this is not the final chapter. The relative strength or weakness of the US and European economies will become a key variable in 2026.

Expectations of fiscal expansion in Germany have fueled bullish confidence, with Deutsche Bank even believing that Europe’s economic rebound led by Germany will push the euro higher. However, political instability in France could become a stumbling block for the European economy. On the other hand, the US economy is not so straightforward—while Bank of America and Goldman Sachs see strong growth, Moody’s remains skeptical, pointing out that the labor market is stagnating and troubles may arise once the AI dividend wanes.

Institutional Forecasts Are Divided into Three Factions

Bullish euro camp: J.P. Morgan expects the euro to reach 1.20 against the dollar in Q2 2026, with a possibility of rising to 1.25 if US data remains weak. Deutsche Bank also agrees, believing the euro could break through 1.20 in mid-month and reach 1.25 by year-end.

Bearish euro camp: Standard Chartered warns that if Germany’s fiscal stimulus proves ineffective, the ECB may be forced to cut rates further, causing the euro to fall back to 1.13 mid-year and approach 1.12 by year-end. Barclays also points to worsening trade conditions, expecting the euro to decline to 1.13 by the end of the year.

Undecided camp: Morgan Stanley depicts a scenario of first rising then falling—the euro could surge to 1.23 in H1 driven by interest rate differentials, even reaching 1.30 in a bullish scenario; but in H2, as European fundamentals weaken and US economic resilience becomes apparent, it could retreat back to 1.16 by year-end.

The 2026 Euro-Dollar Race

The contest between the dollar and euro is essentially a game of expectations. Diverging central bank policies and economic uncertainties have led market participants into different narrative frameworks. Support for the euro comes from Germany’s fiscal stimulus and potential peace agreements; drag on the euro stems from political risks in France and worsening trade conditions.

In short, the direction of the euro against the dollar in 2026 depends on three questions: how many times will the Federal Reserve cut rates, whether Germany’s stimulus will deliver as expected, and whether US economic resilience can outperform expectations. The answers are still on the way.