EUR/USD 2026-2027: Between Interest Rate Divergence and Geopolitical Risk – Where Does the Rate Really Stand?

The Dollar against the Euro experienced a surprising turn in 2025. After years of weakness, the EUR/USD pair was trading at 1.02 in early January, then surged to 1.19 by September – an increase of almost 17%. Currently, the pair consolidates around 1.16. But the key question is: Will this rally continue or will the Euro exchange rate revert to its old weakness? The answer is more nuanced than it seems.

Scenario Analysis: Three possible developments until 2027

The forecast for EUR/USD divides analysts into three camps:

Bull Case (Probability: 30%): The Euro rate breaks through 1.20 and rises to 1.22-1.28. Trigger: Germany stabilizes politically, the 500-billion stimulus takes effect, France calms down. At the same time, the US economy comes under pressure – stagflation, weak labor market, Fed rebellion against Trump.

Base Case (Probability: 50%): EUR/USD fluctuates between 1.10 and 1.20, mostly between 1.14-1.17. The opposing factors balance out. The rate remains volatile but follows the stable interest rate divergence.

Bear Case (Probability: 20%): AfD victory in state elections 2026, grand coalition collapse, stimulus gets stuck. Meanwhile: US economy surprises positively, AI boom boosts productivity. The Dollar recovers, EUR/USD falls to 1.05-1.10.

The Fundamentals: Why interest rate divergences support the Euro

The strongest argument for the Euro is structural. The Fed continues to cut (currently 3.75-4.00%, target 3.4% by end of 2026), while the ECB pauses at 2.0%. This narrowing by over 100 basis points typically leads to a currency adjustment of 5-8% – which would push EUR/USD to 1.22-1.25.

Some analysts even expect the ECB to raise interest rates before the Fed in 2027 if the German stimulus proves more effective. That would be a game-changer for the Euro rate.

Practically, this means: capital flows into euro assets increase, more demand for the euro, higher price. As long as the Fed cuts and the ECB does not, this remains the lower bound for the pair.

The problem: Germany sits on a ticking time bomb

This is where it gets critical. The 500-billion infrastructure stimulus is portrayed as a major game-changer – but reality is more complicated:

Energy costs: German industrial electricity prices are 2-3 times higher than in the US. An infrastructure package won’t change that. Energy-intensive industries remain unattractive. There is a subsidized industrial electricity price of 5 cents/kWh until 2028, but after that, costs will rise again.

Implementation: German infrastructure projects take on average 17 years (13 years for permits). The construction industry reports 250,000 open positions. The stimulus money is flowing slower than hoped.

Politics: State elections in 2026 could make the AfD the strongest party in several federal states (currently ~25% nationwide). This creates uncertainty, increases yields on German government bonds, and raises the cost of the stimulus.

Military budget: A large part of defense spending goes to US weapons (F-35, Patriot). This stimulates America more than Germany.

Conclusion: The stimulus may have less impact than hoped. This would slow the EUR/USD rate.

Trump 2.0 and the US economy: Stronger than expected?

This is the second big wildcard. Trump has so far:

• GDP growth: Q2 2025 at 3.8% (driven by AI investments)
• Tax reform: corporate taxes at 21%, combined with low energy costs
• Secured investments: TSMC ($165 billion in Arizona), Samsung ($44 billion in Texas), Intel ($20 billion in Ohio)
• Trade policy: After threatening 145% tariffs, a compromise was reached – average 15-18%, but with massive investment commitments from other states

The problem: US debt levels are rising. The deficit will reach about 6% of GDP in 2026. Trump’s attacks on Fed independence worry international investors.

Nevertheless: The AI boom could bring 2-3% annual productivity gains. That would be a structural advantage for the Dollar.

France and the Eurozone: Systemic risk

France is a pain point: government collapse in October 2025, deficit ~6% of GDP, debt ratio 113%. French government bonds yield higher than Spanish – a warning sign.

Eurozone growth is sluggish: Q3 2025 at only 0.2% QoQ (annualized 1.3% vs. USA 3.8%). For 2026, hardly anyone expects more than 1.5%.

The bright spot: inflation at 2.0% (ECB target), unemployment at 6.3%. This gives the ECB room to maneuver. But: if the German stimulus is very strong, inflation could pick up, putting the ECB in a dilemma – raising interest rates could trigger crises in highly indebted southern countries.

What do the banks say? A broad consensus with cracks

Most major institutions expect EUR/USD appreciation in 2026:

• Morgan Stanley, BNP Paribas, Goldman Sachs: 1.25
• RBC Capital Markets: 1.24
• JP Morgan, ING: 1.22-1.25
• Wells Fargo: 1.18-1.20 (skeptical)

For 2027, there are explosive forecasts:

• Deutsche Bank: 1.30 (bullish)
• Morgan Stanley: 1.27
• Wells Fargo: 1.12 (stark bearish)

The divergence shows: No one really knows. The forecast depends on whether Germany stabilizes after 2026 and whether the US economy remains resilient.

Trading guidance: How to navigate the uncertainty

For traders: Use the 1.10-1.20 range for range trading. Buy at 1.10-1.12, sell at 1.18-1.20. Most of the time, the pair will move between 1.14-1.17 – the zone of inertia.

Event-driven approach: The following data points are game-changers:

• German state elections (2026)
• Powell successor appointment (May 2026)
• German stimulus figures
• US economic surprises

Risk management: The situation is highly dynamic. Flexibility and quick adaptation are essential. Fixed opinions are costly.

The big risks: What could go wrong

Germany risk: Underestimated. Political instability could stall the stimulus. If the AfD gains strength, German spreads could diverge.

Geopolitical shocks: Escalation in Ukraine or a new energy crisis would be dollar-bullish. Europe’s energy diversification helps but is not immune.

US resilience: The AI boom could be more real than expected. Combined with low taxes, cheap energy, and technological leadership, the US remains highly attractive for companies.

Conclusion: EUR/USD between hope and reality

The Euro rate in 2026-2027 will be guided by interest rate divergences – creating a lower bound around 1.10-1.12 for EUR/USD. The dollar is roughly 23% overvalued (and capital flows are turning), supporting the euro.

But: Germany’s political fragmentation, structurally high energy costs, and the unexpectedly strong US economy are real counterforces.

The forecast thus depends on whether Germany stabilizes after 2026 and whether the stimulus overcomes hurdles – and whether the US economy remains resilient enough to justify its overweight.

Volatility remains the watchword. Traders should position within the 1.10-1.20 range but stay flexible.