EUR/USD 2026-2027 Outlook: Where Are Exchange Rates Heading? Can the Euro's Rally Continue?

The euro delivered an impressive performance in 2025. It jumped from $1.04 at the beginning of the year to $1.16, a 13.5% increase, breaking the trend of continuous depreciation since 2014. But can this appreciation wave continue into 2026 and 2027? The answer is more complex than it appears on the surface.

The Core Logic Behind the Euro’s Appreciation

Interest Rate Differentiation Is the Decisive Factor

The Federal Reserve cut interest rates by a total of 50 basis points in September and October 2025, bringing the current benchmark rate to 3.75%-4.00%, with plans to further reduce it to 3.4% (by the end of 2026). In contrast, the European Central Bank’s rate hike cycle has ended, with deposit rates stabilizing at 2.00% since June.

What does this interest rate gap imply? When US interest rates decline while eurozone rates remain stable, capital tends to flow more easily into European assets, boosting euro demand. Historical data shows that narrowing the interest rate differential by 100 basis points typically triggers a 5-8% currency depreciation offset. From the 1.16 level, this could push EUR/USD to the 1.22-1.25 range.

US Economy: Strength Exceeds Expectations

The performance of the Trump 2.0 administration has been mixed, but overall positive for the dollar. GDP growth in Q2 2025 reached 3.8%, mainly driven by the AI investment boom.

Key policies include:

• Tax Reform Benefits: The “July Good Bill” made the 2017 tax cuts permanent, maintaining a corporate tax rate of 21%
• Focused Investment: Low corporate taxes and energy costs attracted TSMC (building a $16.5 billion plant in Arizona), Samsung ($4.4 billion investment in Texas), and Intel ($2 billion expansion in Ohio)

However, the US faces an increasing debt burden. The deficit is projected to reach 6% of GDP in 2026, and criticisms of the Federal Reserve’s independence by Trump are shaking investor confidence globally.

Germany’s Stimulus Plan: Overestimated Effects?

Germany’s €50 billion, 12-year infrastructure fund is seen as a transformative force in the eurozone. But its actual impact may fall short of expectations.

Three Major Structural Barriers:

1. Energy Cost Dilemma: Industrial electricity prices in Germany are 15-20 euro cents per kWh, 2-3 times higher than in the US. Even with the introduction of industrial electricity prices of 5 euro cents/kWh in 2026-2028, energy-intensive industries (chemical, steel, semiconductors) will still lack competitiveness in the medium term.

2. Implementation Bottlenecks: German infrastructure projects take an average of 17 years from planning to completion (permits alone account for 13 years). The construction sector also faces 250,000 vacant positions. This means the expected multiplier effects could be significantly reduced.

3. Political Uncertainty: The 2026 state elections may see right-wing parties become the largest in some regions, weakening the coalition government’s ability to implement policies and slowing down stimulus progress.

Political Risks in Europe: Hidden Threats

Political turmoil in France cannot be ignored. In October 2025, the government collapsed within 24 hours, with a fiscal deficit reaching 6% of GDP and debt-to-GDP ratio at 113%. French bond yields have surpassed those of Spain, signaling clear warning signs.

Eurozone’s Q3 growth was only 0.2% quarter-on-quarter, annualized at 1.3%, well below the US’s 3.8% during the same period. Inflation is controlled at 2%, and unemployment stands at 6.3%, but this leaves the ECB with a dilemma: if Germany’s stimulus successfully boosts growth, inflation may rise, but rate hikes will burden heavily indebted Southern European countries.

Divergence in Exchange Rate Forecasts

Major institutions’ forecasts for EUR/USD at the end of 2026 are relatively aligned, generally bullish:

Morgan Stanley: 1.25 | BNP Paribas: 1.25 | Goldman Sachs: 1.25 | Capital Market: 1.24 | JPMorgan: 1.22 | ING: 1.22-1.25 | Deutsche Bank: 1.20 | Wells Fargo: 1.18-1.20

By 2027, opinions begin to diverge:

Deutsche Bank: 1.30 (most optimistic), Morgan Stanley: 1.27, Capital Market: 1.24, Deutsche Bank: 1.22, Wells Fargo: 1.12 (only bearish forecast). The divergence stems from differing assessments of US economic resilience and European risks.

Three Future Scenarios

Baseline Scenario: EUR/USD fluctuates between 1.10-1.20

Two opposing forces balance each other. The interest rate differential supports 1.10-1.12, but European risks cap the top at 1.18-1.20. Germany’s stimulus has limited effect, and US growth remains moderate at 1.8-2.2%. The market oscillates between 1.14 and 1.17.

Pessimistic Scenario: Euro drops to 1.05-1.10

2026 state elections trigger political crises, hindering stimulus implementation, and German bond spreads widen. France’s fiscal crisis worsens, forcing the ECB to passively cut rates. Meanwhile, US AI productivity increases by 3%, inflation falls back to 2%, and the Fed halts rate hikes. EUR/USD could fall below 1.05.

Optimistic Scenario: Euro surges to 1.22-1.28

Germany’s political situation stabilizes, stimulus measures accelerate, and GDP growth reaches 2% (a historic high for the eurozone). The ECB signals rate hikes by the end of 2026. Meanwhile, the US faces difficulties: persistent inflation, worsening employment, and escalating conflicts between Trump and the new Fed chair. International investors sell US assets, EUR breaks above 1.20, targeting 1.22-1.28.

Key Watchpoints and Risks

Upcoming key events include: Germany’s 2026 state elections, Fed Chair change (May 2026), France’s fiscal developments, Germany’s stimulus data, and US economic indicators.

Major Risks Not to Be Overlooked:

• Underestimation of Germany’s political risks by markets
• Escalation of Ukraine conflict or a new energy crisis triggering a sharp dollar rally
• US AI revolution potentially generating 2-3% annual productivity growth, giving the US structural advantages

Final Judgment

EUR/USD in 2026-2027 will be at the intersection of multiple forces. The interest rate differential supports 1.10-1.12, the dollar is overvalued by 20-25%, and capital flows may reverse—these factors favor the euro. However, political fragmentation in Germany and France, Europe’s structural disadvantages (high energy costs, regulatory complexity), and the resilience of the US economy pose clear risks.

The key question is: can Germany achieve political stability and effectively implement stimulus after the 2026 state elections? Can the US economy sustain its current growth momentum? The answers to these questions will determine whether the euro enters a new appreciation wave or faces a strong dollar resurgence.