2026-2027 Euro to USD Outlook: Uncertainty After a Historic Rebound

Current Market Landscape: Deep Drivers Behind the Euro Reversal

The performance of the euro against the US dollar in 2025 has been remarkable. Since the low of 1.04 USD at the beginning of the year, this currency pair has risen to 1.16 USD, a cumulative increase of 13.5%. This not only breaks the long-term depreciation trend since 2014 but also signifies a fundamental shift in Europe’s monetary policy environment.

In mid-September last year, EUR/USD briefly reached a yearly high of 1.1868, followed by fluctuations within the 1.14-1.17 range. This intense volatility reflects the market’s repeated weighing of multiple conflicting forces. From a technical perspective, support levels are concentrated at 1.1550 and 1.1470, while resistance above lies between 1.1800 and 1.1920. A break below 1.15 would undermine the bullish case; if it stabilizes above 1.20, it could open up room for an advance toward 1.22-1.25.

Rate Differentiation: The Core Logic Behind the Euro’s Strength

The most direct factor driving the euro’s appreciation stems from divergence in central bank policies. Since mid-year, the Federal Reserve has cut rates by a total of 50 basis points, with the current policy rate in the 3.75%-4.00% range, and a commitment to further lowering to 3.4 by the end of 2026. In contrast, the European Central Bank’s tightening cycle has largely concluded—its deposit rate has remained at 2.0% since June, with policymakers generally deeming further adjustments unnecessary.

This narrowing of interest rate differentials historically tends to trigger exchange rate adjustments. When US rates decline while Eurozone rates remain stable, capital tends to flow systematically into euro assets. Based on historical patterns, a contraction of 100 basis points in the interest rate gap often results in a 5-8% exchange rate adjustment—implying EUR/USD could rise to the 1.22-1.25 range. Some analysts even expect that if Germany’s stimulus policies fully take effect, the ECB might lead rate hikes as early as 2027, further amplifying euro appreciation.

US Economy: Strength Still Present but with Significant Worries

Since the Trump administration took office, its economic policies have produced complex outcomes. In Q2 2025, US GDP growth reached 3.8%, primarily driven by investments related to artificial intelligence. This indicates that US technological innovation remains at the forefront globally.

Regarding tax reforms, the “Unique Act” introduced in July made the 2017 tax cuts permanent, fixing the corporate tax rate at 21%. Coupled with energy cost advantages, this has attracted substantial manufacturing investments: TSMC’s $165 billion investment in three wafer fabs in Arizona, Samsung’s $44 billion commitment in Texas, and Intel’s $20 billion investment in Ohio.

However, the other side of the coin is equally clear: US fiscal deficits are projected to reach 6% of GDP by 2026, and frequent accusations by Trump regarding the Fed’s independence are eroding international investor confidence. As a result, the dollar has depreciated against the euro by over 10% cumulatively in 2025. While this depreciation short-term boosts US manufacturing competitiveness, whether it can be sustained long-term remains uncertain.

Germany’s €120 Billion Plan: Potential and Dilemmas

Berlin’s 12-year infrastructure fund is widely viewed as a turning point for the eurozone. However, its actual effectiveness may be overly optimistic.

Energy Cost Dilemma is the primary obstacle. German household electricity prices are 30-35 euro cents per kWh, industrial prices are 15-20 euro cents per kWh, both 2-3 times higher than in the US. Although the government has set a cap of 5 euro cents per kWh for industrial electricity from 2026 to 2028, this is only a temporary subsidy and cannot eliminate structural cost disadvantages. For energy-intensive industries like chemicals, steel, and semiconductors, Germany remains unattractive in the medium to long term.

Slow Project Implementation is the second bottleneck. German infrastructure projects typically take an average of 17 years from planning to completion, with approval phases alone taking 13 years. The construction sector currently faces a shortage of 250,000 workers, which, along with other factors, weakens the investment multiplier effect.

Shift in Spending Structure is the third issue. Defense spending within the “Special Fund” may partly flow to the US, used for purchasing F-35 fighters, Patriot missiles, and Seahawk helicopters. This effectively stimulates the US economy rather than Europe’s domestic industries.

Political Barriers may be the most decisive. In the 2026 German state elections, the AfD (Alternative for Germany) polls near 25%, potentially becoming the strongest party in some states. The grand coalition’s support is waning, and public approval is declining—such political fragmentation could push up German bond yields, directly increasing the cost of stimulus plans.

France and the Eurozone: Political Turmoil Dampens Outlook

France’s situation is concerning. The newly formed government collapsed within 24 hours in October, with a deficit around 6% of GDP and debt at 113%—these figures already surpass Spanish bond yields, signaling clear risks.

The overall eurozone economy remains weak. Q3 growth was only 0.2 quarter-on-quarter, with an annualized rate of 1.3%, well below the US’s 3.8% in the same period. The 2026 growth forecast is just 1.5%, depending heavily on the extent of German stimulus.

The only bright spot is controlled inflation: current eurozone inflation is 2.0%, exactly at the ECB’s target, and the unemployment rate at 6.3% remains manageable. This provides room for the ECB to keep rates steady.

However, underlying contradictions are building. If German stimulus policies overperform, they could push inflation higher, forcing the ECB to hike rates—disaster for high-debt countries. While the ECB has fragmentation tools (TPI), their effectiveness depends on cooperation from member states, which is currently lacking.

Bank Forecasts: Convergence in 2026, Divergence in 2027

Major financial institutions’ forecasts for EUR/USD at the end of 2026 are mostly clustered between 1.18 and 1.25:

• Morgan Stanley, BNP Paribas, Goldman Sachs all see 1.25
• Caisse d’Epargne sees 1.24
• JPMorgan sees 1.22
• ING sees 1.22-1.25
• Commercial banks around 1.20
• Wells Fargo around 1.18-1.20

By 2027, divergence widens significantly. Deutsche Bank is most optimistic, targeting 1.30; Morgan Stanley at 1.27; Wells Fargo expects a possible decline back to 1.12. The divergence stems from differing assessments of US economic resilience and European political stability.

Three Possible Evolution Paths

Baseline Scenario (EUR/USD fluctuates within 1.10-1.20)

This is the most probable outcome. Interacting factors remain balanced, with euro appreciation drivers (interest rate differentials, US overvaluation) offset by euro depreciation pressures (European risk premiums, US growth resilience). German stimulus partially takes effect but with limited impact; US growth moderates to 1.8-2.2%. In this scenario, the market would position for dips around 1.10-1.12, take profits near 1.18-1.20, with a normal trading range of 1.14-1.17.

Pessimistic Scenario (falls to 1.05-1.10)

Disappointing German state election results in 2026, with the AfD gaining significant support, causing the grand coalition to falter and stimulus plans to stall. German bond spreads widen sharply, and a fiscal crisis in France prompts the ECB to restart rate cuts to maintain financial stability. Meanwhile, US performance exceeds expectations: AI-driven productivity boosts, inflation falls back to 2%, and the Fed pauses at 3.5%. EUR/USD could dip to 1.08-1.10, possibly touching 1.05.

Optimistic Scenario (rises to 1.22-1.28)

Germany successfully navigates political hurdles, stimulus funds accelerate, France stabilizes, and eurozone GDP growth surpasses 2%—a revolutionary development for Europe. The ECB hints at rate hikes in 2027, further supporting the euro. The US faces stagflation: persistent inflation, weakening employment, and escalating pressure from Trump on the Fed (with Powell’s successor becoming a focus after May 2026). Foreign investors sharply reduce dollar holdings. EUR/USD breaks above 1.20 and surges to 1.22-1.28.

Decisive Variables and Response Strategies

Key upcoming events over the next two years include: German state elections, Fed leadership transition, France’s fiscal trajectory, progress of German stimulus spending, and US economic data.

Given the high uncertainty, event-driven flexible strategies are preferable over mechanical directional positions. Risk management should be prioritized—current divergences in dollar forecasts already imply significant information gaps and sentiment volatility risks.

Potential hidden risks include: underestimating German political risks, geopolitical shocks (Ukraine escalation, new energy crises) triggering safe-haven flows into the dollar, and US innovation possibly driving stronger economic growth (annual productivity gains from AI could reach 2-3%).

Conclusion

EUR/USD faces multiple forces vying in 2026-2027. Interest rate differentials and US overvaluation provide a support floor around 1.10-1.12, but political fragmentation, structural energy disadvantages, and US economic resilience set a ceiling at 1.18-1.20—at least under the baseline scenario.

The key questions are: Can Germany stabilize quickly after the 2026 elections and push through stimulus measures? Will US AI dividends offset fiscal risks? The answers to these will determine whether the euro enters a new appreciation cycle or the dollar regains relative strength. The current dollar trend remains uncertain, and investors need to balance flexibility with strict risk controls.