EUR/USD 2026-2027: Will the US dollar rise? Is the euro's rally really that reliable?

The euro experienced an impressive rebound in 2025. Starting the year at 1.04 USD, it climbed all the way to 1.16 USD, a 13.5% increase. This rally has broken a decade-long depreciation trend. But the key question is: Will the dollar rise again, or can the euro’s strength continue into 2026-2027? The answer is far more complex than it appears.

From Historical Lows to Rebound Peaks: How 2025 Changed Everything

The 20-year low of 1.0243 USD created in January now seems like a thing of the past. In April, the euro broke through a long-standing suppression channel, reaching a high of 1.1868 in mid-September. Currently fluctuating around 1.16, with a trading range over 1600 points, it shows extreme volatility.

From a purely technical perspective, support levels are at 1.1550 and 1.1470. Falling below 1.15 would cast doubt on the previous bullish pattern and could open the door to 1.10-1.12. Resistance is at 1.1800-1.1920; only a break above 1.20 would pave the way for further gains toward 1.22-1.25.

The Paradox of Narrowing Interest Rate Differentials: Why Diverging Central Bank Policies Raise Doubts

On the surface, the divergence in monetary policies between the Federal Reserve and the European Central Bank (ECB) is the strongest support for euro appreciation. The Fed has cut rates by 50 basis points in the second half of the year to a range of 3.75%-4.00%, hinting at further cuts to 3.4%. Meanwhile, the ECB has already halted its rate-cut cycle—deposit facility rate has remained at 2.00% since June.

According to historical patterns, a narrowing of 100 basis points in interest rate differentials typically triggers a 5-8% exchange rate adjustment, theoretically pushing EUR/USD to 1.22-1.25. Some analysts even suggest the ECB might hike rates first in 2027, assuming Germany’s stimulus measures have a significant effect.

But there is a hidden concern: if stimulus effects trigger inflation surges beyond expectations, the ECB may be forced to hike rates; if stimulus is weak, the euro’s foundation could weaken. In either case, the interest rate differential argument is less stable than it seems.

US Economic Resilience: The Counterargument that Dollar Will Rise

Trump’s second term has so far shown a complex but relatively positive record. Q2 GDP growth reached 3.8%, mainly driven by AI investments.

The big show of tariff negotiations played out as expected—April’s “Liberation Day” threatened 145% tariffs, frightening markets, but quickly evolved into a 90-day truce, with average tariffs settling at 15-18%, higher than the previous level but far below initial threats. More importantly, this “ask first, compromise later” script has secured billions of dollars in foreign investment commitments—Japan, the EU, and Taiwan have all agreed to invest in the US, strengthening the US economy.

Tax reform benefits and the chip boom further boost US attractiveness. The “Unique and Wonderful Act” in July made the 2017 tax cuts permanent, maintaining corporate tax at 21%. Coupled with cheap energy, this has attracted a wave of industry relocations: TSMC pledged $165 billion investment in Arizona, Samsung invested $44 billion in Texas, and Intel expanded by $20 billion in Ohio. These figures show that under the combined advantages of low taxes, energy costs, and technological edge, the US remains highly attractive to global capital.

However, shadows are growing: US debt continues to rise, with deficits expected to reach 6% of GDP in 2026. Trump has repeatedly criticized the Fed’s independence, shaking investor confidence. The dollar has already depreciated over 10% against the euro this year. This may be exactly what Trump wants—to weaken the dollar to boost exports and domestic investment. But the long-term sustainability is questionable.

Germany’s €50 Billion Stimulus Plan: Looks Good on Paper, But Implementation Risks Are High

The €50 billion infrastructure fund is seen as a potential “trump card” for euro appreciation, but in reality, this card may be overestimated.

Energy costs remain a challenge: industrial electricity prices in Germany are 15-20 euro cents per kWh, 2-3 times higher than in the US. Although subsidies of 5 euro cents per kWh are planned from 2026-2028, this cannot fundamentally change the situation. Energy-intensive industries (chemical, steel, chip manufacturing) will continue to lack competitiveness in Germany, and the possibility of returning relocated capacity is slim. The multiplier effect of stimulus funds is thus significantly limited.

The “death delay” of construction cycles: German infrastructure projects take an average of 17 years from planning to completion, with approval processes alone taking 13 years. Coupled with a shortage of 250,000 construction workers, low efficiency is inevitable. By the time projects are finished, the industrial landscape may have already changed.

Military spending flow issues: Part of the defense expenditure (F-35, Patriot missiles, Chinook helicopters) will flow to US manufacturers, stimulating the US economy rather than Germany’s.

Political volatility is the most lethal: In the 2026 state elections, the far-right National Democratic Party (NPD) could become the largest party in several states (polls show 25% support nationwide). The grand coalition’s public trust has already collapsed. Such political divisions will push up German bond spreads, increasing the cost of financing the stimulus plan.

France’s Crisis and the Growth Dilemma of the Eurozone

France’s government collapse in October once again highlights the fragility of the euro area. The country’s deficit is 6% of GDP, debt ratio at 113%, and government bond yields are higher than Spain’s—an alarming signal.

Q3 eurozone growth was only 0.2% quarter-on-quarter (annualized 1.3%), far below the US’s 3.8% in the same period. The 2026 forecast is 1.5%, depending on how much of Germany’s stimulus actually materializes. The only bright spots are a 2% inflation rate and a 6.3% unemployment rate, providing some breathing room for the ECB to maintain policy balance.

However, the ECB faces a “cursed dilemma”: if Germany’s stimulus overheats, inflation will rise again, forcing rate hikes; if the economy recovers weakly, the ECB will struggle to justify further rate cuts. Even with fragmented defense tools (TPI), political coordination among countries is lacking.

Diverging Analyst Predictions: Why the Consensus Is Falling Apart

Disparities in 2026 year-end forecasts reflect the market’s real dilemma:

2027 year-end forecasts reveal even deeper disagreements:

Why is Wells Fargo so bearish? The bank emphasizes that the Fed will eventually stop cutting rates, the US economy will accelerate again, and the euro lacks structural attractiveness. This is not a deviation but a serious warning about the dollar will rise.

Three Possible Futures: Which Is Most Likely

Neutral scenario (most likely): Bull and bear factors offset each other, EUR/USD fluctuates between 1.10-1.20, with core levels at 1.14-1.17. The interest rate differential sets a downside floor at 1.10-1.12, but European risks cap upside potential at 1.18-1.20. Germany’s stimulus has limited effect, US growth remains moderate at 1.8-2.2%.

Recession scenario: The 2026 state elections trigger political crises, the grand coalition collapses, stimulus plans stall. German bond spreads widen sharply, France’s fiscal crisis worsens. The ECB is forced to cut rates again, while the US surprises with a 2-3% productivity boost from AI, lowering inflation to 2%, and the Fed pauses at 3.5%. EUR/USD drops to 1.08-1.10, even testing 1.05. In this case, the dollar will rise.

Optimistic scenario: Germany’s politics stabilize, stimulus accelerates, eurozone GDP growth jumps to 2% (a revolutionary change). France’s crisis eases, and the ECB signals rate hikes in early 2027. Meanwhile, the US faces stagflation: stubborn inflation, weak employment, and capital outflows. The ECB president’s change in May sparks increased concerns over Fed independence. EUR/USD breaks above 1.20, heading toward 1.22-1.28.

Key Turning Points and Trading Advice

Decisive moments in 2026:

• German state elections (spring): will the political situation stabilize?
• Fed chair appointment (May): stance on independence
• German stimulus data (throughout the year): actual implementation rate
• French budget (summer): any new government collapse risks

These events will gradually reveal which scenario we are in. Given the broad uncertainty, rigid one-way bets are unwise. Instead, a flexible, event-driven trading strategy—buying dips at 1.10-1.12 and selling in batches at 1.18-1.20—is more aligned with the current risk landscape.

Underestimated Risk Map

German political crisis is real: the rise of the far right has deep social roots, not just economic cycles. This will translate into rising bond spreads and exchange rate pressure.

Geopolitical black swan: escalation in Ukraine or a new energy crisis could trigger panic-driven dollar flows. Europe’s energy diversification has progressed but remains vulnerable.

US resilience is underestimated: AI-driven productivity gains could reach 2-3% annually, and the combination of low taxes and cheap energy is hard to replicate elsewhere. This provides a real basis for a mid-term dollar rebound.

Conclusion: Crossroads of Multiple Forces

The euro vs. dollar exchange rate in 2026-2027 will sway among four forces: rate differentials pushing euro higher, political fragmentation pulling dollar higher, US growth resilience countering Europe’s sluggish recovery, and structural energy disadvantages limiting Europe’s potential.

While diverging central bank policies should support the euro, Europe’s political fragility dampens this. The dollar has already depreciated over 10% this year, but this may be a phase rather than a long-term trend reversal. The dollar will rise scenario requires specific triggers, but risks are not negligible.

The 2026 state elections and Fed leadership changes will be the ultimate test. Only then can our judgment on 2027 truly take shape.

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