USD Trend Forecast 2026: ECB holds steady, Fed continues easing, Euro rebound possible

Bull and Bear Opinions Diverge, Key Lies in Europe and US Policy Divergence

By 2026, the direction of the euro against the dollar will be in the hands of European and American central banks. JPMorgan Chase, Bank of America, and Deutsche Bank hold bullish views, expecting the euro to rise to 1.20 to 1.25; however, Standard Chartered, Barclays, and Citibank are bearish, predicting the euro will fall to 1.12 to 1.13. Why do the same assets lead to such divergent judgments? The answer lies in the subtle differences in central bank policy expectations.

European Central Bank Has Hit the Brakes, Fed Still Accelerating

Europe’s economy remains resilient, with inflation gradually easing, leading the European Central Bank to declare the end of its rate hike cycle. Citibank expects the ECB to keep interest rates fixed at 2%, at least until the end of 2027.

On the other hand, the US scene is different. Major banks like Goldman Sachs, Morgan Stanley, and Bank of America forecast that the Federal Reserve will make two moves in 2026, each cutting 25 basis points, totaling 50 basis points. Even the more cautious JPMorgan Chase and Deutsche Bank believe the Fed will cut at least once. Narrowing interest rate spreads are usually positive for the euro — this is the confidence source for the bullish camp.

Fundamentals: Germany Supports, US Uncertain

The economic outlook for the US and Europe remains uncertain. Germany is preparing for large-scale fiscal stimulus, which could boost European growth, but political risks in France remain, potentially acting as a drag. US banks and Goldman Sachs are optimistic about strong US growth in 2026, but Moody’s remains skeptical, warning that the US labor market is stagnating, and once AI-driven boosts fade, the US economy could face trouble.

Bullish Logic: Germany’s Engine Starts, Euro Breaks New Highs

JPMorgan believes that European economic growth combined with German fiscal expansion will support a moderate rise in the euro. The bank expects the euro to reach 1.20 against the dollar in Q2 2026, and if US economic data weaken, it could even surge to 1.25. Deutsche Bank’s outlook is more optimistic: with Germany leading Europe’s recovery and potential peace negotiations in the Russia-Ukraine conflict, these positives will drive the euro to break 1.20 in mid-2026 and reach 1.25 by year-end.

Bearish Concerns: Fiscal Stimulus May Fall Short, Trade Conditions Worsen

Standard Chartered warns that if Germany’s fiscal stimulus does not trigger the expected economic rebound, the ECB may be forced to continue rate cuts to cope with external growth pressures, which would weaken the euro’s attractiveness. The bank expects the euro to fall to 1.13 by mid-2026 and further decline to 1.12 by year-end. Barclays focuses on trade factors, noting that the eurozone’s trade conditions have significantly worsened, with growth and inflation expectations already high, facing clear downside risks, and expects the euro to fall to 1.13 against the dollar by year-end.

Volatility Middle Ground: Rollercoaster of Rise and Fall

Morgan Stanley adopts the most pragmatic stance: in the first half of 2026, with the Fed cutting rates and narrowing US-Europe interest rate spreads, the euro could rise to 1.23, and in optimistic scenarios, even reach 1.30. However, in the second half, as European fundamentals weaken again and US economic resilience exceeds expectations, the euro is expected to fall to 1.16 by year-end.

How Should Investors Respond?

The core of the 2026 USD outlook depends on two variables: first, whether the ECB will be forced to break its rate hike cycle; second, whether US economic growth can continue to outperform expectations. If European fiscal stimulus works as planned and US growth weakens, there is room for euro appreciation; otherwise, downside risks increase. Market participants should closely monitor German economic data, US employment reports, and the latest guidance from both major central banks.