2026 Euro Trend Divergence: Central Bank Policy Differences Triggering Exchange Rate Fluctuation Expectations

In 2025, the euro performed remarkably well, appreciating a total of 14% against the US dollar. Looking ahead to 2026, the divergence in policies between the European Central Bank and the Federal Reserve has become a key variable in determining the euro’s future trajectory. Several investment banks hold differing views on the euro’s outlook, with forecasts ranging from 1.12 to 1.30, reflecting the uncertainty in 2026.

Central Bank Policies Create a “Scissor Effect”

The primary driver of the euro’s movement stems from divergent expectations of central bank policies.

On the European side, supported by economic resilience and falling inflation, the market generally believes the ECB has entered a pause in rate cuts. Citibank predicts that the ECB will keep interest rates at 2% until the end of 2027. This indicates a relatively stable European interest rate environment.

In contrast, the Federal Reserve’s policy stance shows a different trajectory. Goldman Sachs, Morgan Stanley, and Bank of America forecast two rate cuts in 2026, totaling 50 basis points; J.P. Morgan and Deutsche Bank expect a single cut of 25 basis points. Regardless of the forecast, the consensus is that the Fed will generally move towards easing.

The narrowing of the US-Europe interest rate differential will directly support euro appreciation, which is the main logic behind the euro’s potential strength in the first half of 2026.

Economic Fundamentals Show “Mixed Signals”

The economic outlook for Europe presents a complex picture. Germany’s large-scale fiscal stimulus is expected to boost economic recovery and serve as a growth engine for the eurozone. However, high political uncertainty in France may drag down overall European performance.

The US economy also shows conflicting signs. US banks and Goldman Sachs are optimistic about US growth in 2026, but Moody’s has issued warnings that US employment growth is sluggish. If AI-driven productivity gains weaken, the US economy could face significant challenges.

This uncertainty in economic fundamentals adds variables to the euro’s movement.

Institutional Views Show “Bull-Bear Clash”

Predictions for the euro’s trend in 2026 vary sharply among investment banks.

Bullish camp: J.P. Morgan, Bank of America, and Deutsche Bank tend to be optimistic. J.P. Morgan expects the euro to reach 1.20 against the dollar in Q2, possibly rising to 1.25 if US economic data remains weak. Deutsche Bank believes that Germany-led economic growth and a potential peace agreement between Russia and Ukraine will push the euro above 1.20 in mid-year, reaching 1.25 by year-end. Morgan Stanley is optimistic about the first half, forecasting the euro could rise to 1.23, with an even more bullish scenario reaching 1.30.

Bearish camp: Standard Chartered, Barclays, and Citibank adopt a cautious stance. Standard Chartered warns that if Germany’s fiscal stimulus underperforms, the ECB may be forced to cut rates, causing the euro to fall to 1.13 in the medium term and to 1.12 by year-end. Barclays points out worsening trade conditions in the eurozone, expecting the euro to decline to 1.13 by year-end.

Morgan Stanley offers a unique divergence forecast: due to narrowing US-Europe interest rate spreads in the first half, the euro could rise to 1.23; but in the second half, with weak European fundamentals and resilient US economy, it could adjust down to 1.16 by year-end.

Three Key Factors for the Euro’s 2026 Trend

The future trend depends on three core variables: changes in the US-Europe interest rate differential, the effectiveness of Germany’s fiscal stimulus, and US economic momentum. If the US economy stalls and Germany’s stimulus proves effective, breaking above 1.25 is not a fantasy; conversely, if European growth underperforms and US resilience persists, the euro may face a correction.

In 2026, the euro’s movement is likely to fluctuate amid tug-of-war between bullish and bearish forces. Investors should closely monitor central bank policy signals and economic data changes.