2026 EUR/USD Outlook: Will Rate Differentials or Growth Fears Drive the Euro?

The euro’s 2026 trajectory hinges on a widening policy divergence: the Federal Reserve is likely to cut rates multiple times, while the European Central Bank appears ready to hold steady. This growing gap won’t automatically push EUR/USD lower—what matters is why the gap widens and whether European growth can hold its ground.

The Fed’s easing bias looks entrenched; the ECB sees no urgency to move

The Fed has already delivered three rate cuts in 2025, bringing the federal funds target to 3.5%–3.75%. Major banks (Goldman Sachs, Morgan Stanley, Bank of America, Wells Fargo, Nomura, Barclays) broadly expect two additional cuts in 2026, potentially taking policy to 3.00%–3.25%. The narrative driving this isn’t robust growth; it’s a “delicate balance” where inflation has cooled enough to justify continued easing without risking a reacceleration.

Political context adds another layer. Jerome Powell’s term ends in May 2026, and Trump—who has criticized Powell for moving too slowly on cuts—is expected to appoint a successor more aligned with faster easing. That structural shift could sustain the Fed’s dovish bias through 2026.

By contrast, the ECB stands pat. At its December 18 meeting, the governing council held all rates unchanged: the deposit facility rate at 2.00%, the main refinancing rate at 2.15%, and the marginal lending facility at 2.40%. President Christine Lagarde’s post-meeting commentary—describing policy as in a “good place”—signaled no urgency to move. A Reuters poll found most ECB watchers expect rates to remain unchanged through 2026 and 2027, though the 2027 range (1.5%–2.5%) hints confidence erodes further out.

Eurozone inflation is creeping back; growth is sluggish but not collapsing

The case for ECB patience rests partly on sticky inflation. Eurostat data for November showed headline inflation at 2.2% year-on-year, up from 2.1% the month before—above the ECB’s 2.0% target. More worrying: services inflation accelerated to 3.5% from 3.4%, exactly the category central banks fear. Until that narrative shifts, rushing to cut would undermine credibility.

On growth, the Eurozone picture is mixed. Q3 GDP expanded 0.2%, but the regional breakdown reveals uneven momentum: Spain (0.6%) and France (0.5%) outpaced Germany and Italy, which flatlined. The European Commission’s autumn outlook pegged 2025 growth at 1.3%, with a downward revision for 2026 to 1.2%—a quiet signal that next year may be bumpier than consensus assumes.

Structural headwinds compound the story. Germany’s auto sector has shed 5% of output amid the EV transition and supply chain strain. Underinvestment in innovation has left Europe trailing the US and China in key tech segments. Add the Trump administration’s threat of 10–20% “reciprocal tariffs” on EU goods, and EU exports to the US are reportedly falling 3%, with autos and chemicals hardest hit.

Yet the baseline remains: the Eurozone isn’t collapsing, just muddling. That distinction matters for the euro’s fundamental anchor.

The two scenarios that frame EUR/USD in 2026

The interplay between Fed cuts and ECB inaction will shape the rate differential. But the number alone doesn’t determine direction—the narrative around why rates move does.

Scenario 1: Europe holds, Fed cuts more

If Eurozone growth stays above 1.3% and inflation stays manageable, the ECB likely maintains its patient stance while the Fed continues easing. The narrowing yield gap actually supports the euro, because the rate differential is closing from a position of Fed accommodation, not ECB urgency. UBS Global Wealth Management’s chief strategist Themis Themistocleous expects this outcome could push EUR/USD to 1.20 by mid-2026.

Scenario 2: Europe slows, trade shocks bite

If Eurozone growth disappoints below 1.3% and trade friction worsens, market expectations may shift toward ECB cuts to shore up activity. In that case, the policy divergence widens for a different reason—ECB easing, not just Fed cuts—and the euro loses its footing. Citi Research projects a more pessimistic path: it expects USD strength to dominate, with EUR/USD potentially falling to 1.10 in Q3 2026, roughly a 6% decline from current levels.

The 1.13 support zone sits between these poles. It’s the level where growth concerns would likely trigger, but before outright ECB cutting becomes the base case.

The bottom line: It’s not just about rate differentials

Forecasters diverge because the inputs diverge. Citi assumes the Fed cuts less than markets expect and US growth re-accelerates. UBS leans on a narrower yield gap supporting the euro even as the Fed eases. Both use the same data but weight the drivers differently.

The 2026 story for EUR/USD ultimately boils down to whether Europe can sustain its sluggish-but-stable growth momentum while managing sticky services inflation. If it does, the Fed’s easing cycle won’t sink the euro—and 1.20 remains on the table. If European growth rolls over and the ECB pivots to cuts, the euro loses its insulation, and 1.13 (or lower) stops being a worst-case scenario and becomes a live risk.