EUR/USD in the Crossfire: Why the Dollar Will Reorient Itself in 2026-2027

The euro made history in 2025: From January to September, EUR/USD climbed from 1.02 to 1.19 USD – an appreciation of over 15%, breaking a two-decade-long downtrend. But this impressive rally reveals a deeper mystery: Will the bulls maintain their dominance, or is there a fragile configuration hidden beneath this strength that could easily collapse? How the dollar develops in 2026 will be decisive. Our detailed EUR/USD analysis for 2026-2027 shows: The answer lies not in linear thinking, but in the balance between structural fundamentals and unpredictable political upheavals.

The starting point: Massive volatility despite a clear upward trend

Mid-November 2025, the pair is trading around 1.16 USD. The year’s trading range exceeded 1,600 pips – a volatility that reflects both euphoria and uncertainty in the markets. The annual high of 1.1868 (September) and the low of 1.0243 (January) show: How the dollar develops is not a simple question, but a scenario with multiple outcomes.

Technically, 1.1550 and 1.1470 serve as critical supports. A break below would damage the bullish narrative and activate targets around 1.10-1.12. On the upside, 1.1800-1.1920 forms a stubborn resistance – only a convincing breakout above 1.20 opens the door to 1.22-1.25.

Interest rate differential: The fundamental foundation of the euro thesis

The core of the EUR/USD story lies in monetary policy divergence. The Fed cut rates by a total of 50 basis points in 2025 (key interest rate now 3.75-4.00%) and signals further cuts to 3.4% by the end of 2026. Meanwhile, the ECB has practically ended its cycle: the deposit rate has remained at 2.00% since June, and further easing appears unlikely in the medium term.

Here, a proven pattern applies: When interest rate gaps narrow, currency rates tend to adjust accordingly. A narrowing of 100 basis points historically leads to a revaluation of 5-8%. The calculation is tempting: EUR/USD could rise from the current 1.16 to 1.22-1.25. Some market participants even speculate that the ECB might raise again in 2027 before the Fed, if Germany’s infrastructure package proves more effective – how the dollar develops would then reverse completely.

America’s surprising resilience: The Trump Effect 2.0

The second Trump administration provides an ambivalent record with significantly positive nuances for the US economy. GDP growth reached a strong 3.8% in Q2 2025, driven by an unprecedented AI investment boom.

Tariff strategy as negotiation leverage

“Libération Day” (April 2) with threatened tariffs up to 145% caused market shocks but ended in a 90-day pause – Trump’s classic pattern: set maximum demands, then compromise and portray it as a victory. The average tariff rate is 15-18%, well below peak levels. Crucially, Trump secured investment commitments worth billions. TSMC plans three chip factories in Arizona (165 billion USD), Samsung invests 44 billion in Texas, Intel expands in Ohio with 20 billion USD. These capital shifts significantly support the domestic economy.

Taxes and technology as growth engines

The “One Big Beautiful Bill Act” (July 4) permanently anchored the 2017 tax cuts: corporate taxes remain at 21%. Combined with low energy costs (US industrial electricity: 5-7 cents/kWh), an attractive investment environment is created. The AI sector could generate 2-3% annual productivity gains – a structural advantage for the dollar.

However, debt levels are rising. The fiscal deficit will reach about 6% of GDP in 2026. Trump’s attacks on Fed independence undermine trust among international investors. How the dollar develops will be critically dependent on whether US fiscal sustainability remains manageable.

The German puzzle: Stimulus as hope and risk

The 500-billion-euro infrastructure fund is the game-changer that analysts credit for EUR/USD appreciation. But reality could be more subdued:

Energy costs as a structural obstacle: German electricity prices are 30-35 cents/kWh for households, 15-20 cents/kWh for industry – two to three times higher than in the US. An infrastructure package does not reduce this cost structure. Although a 5-cent/kWh industrial electricity price applies from 2026, Germany remains unattractive for energy-intensive industries long-term. This reduces the expected multiplier effects.

Implementation delays: German infrastructure projects take an average of 17 years from planning to completion (13 years just for permits). With 250,000 open positions in the construction sector, massive implementation delays are emerging.

Military spending may stimulate the US: Parts of the “special fund” flow into US systems (F-35, Patriot, Chinook) – which strengthens America’s value creation rather than Germany’s.

Political risk intensifies: The 2026 state elections could make the AfD the strongest party in several federal states (currently ~25% nationwide). A dysfunctional grand coalition would hinder implementation and raise German bond yields. How the dollar develops against the euro also depends on German political factors.

France’s crisis as a burden for the eurozone

France’s fiscal situation is worsening: deficit at ~6% of GDP, debt ratio at 113%. In October, a government collapsed within 24 hours. French government bonds now yield higher than Spanish – a warning sign. The eurozone grew only 0.2% quarter-on-quarter (1.3% annualized) in Q3 2025, while the US posted 3.8%. For 2026, analysts expect only 1.5% eurozone growth.

A glimmer of hope: inflation at 2.0% (ECB target), unemployment at 6.3%. But the ECB faces a dilemma: if Germany’s stimulus fuels inflation, the ECB would need to hike – destabilizing highly indebted countries. Raising rates without fragmentation tools would put the eurozone under pressure.

Bank forecasts: Consensus with cracks

Analysts agree that EUR/USD will be higher in 2026. For the end of 2026, the ranges are relatively tight:

In 2027, divergence increases. The bullish majority (Deutsche Bank: 1,30, Morgan Stanley: 1,27) argues with persistent interest divergence. Wells Fargo trusts in a USD comeback (1,12) based on Fed rate hikes and US growth. How the dollar develops over the next decade will depend not only on interest rates but also on structural competitiveness.

Three future scenarios

Base case: ranging between 1.10–1.20

The most likely scenario: opposing forces neutralize each other. Interest rate differences support the euro and create a floor around 1.10-1.12. European risks (political instability, energy costs) limit upside potential to 1.18-1.20. Germany’s performance is mixed – stimulus partly works but also peters out. The US grows moderately (1.8–2.2%) without recession. Investors buy at 1.10-1.12, sell at 1.18-1.20. The rate oscillates between 1.14 and 1.17.

Bear scenario: Germany in crisis → EUR/USD 1.05–1.10

The 2026 state elections bring big gains for the AfD, the grand coalition fragments, and stimulus stagnates. German spreads widen, France’s fiscal crisis escalates, and the ECB must cut again. Meanwhile, the US surprises positively: AI boom boosts productivity, inflation falls to 2%, Fed pauses at 3.50%. EUR/USD drops to 1.08-1.10, possibly testing 1.05. How the dollar develops in this case? It dramatically consolidates its dominance.

Bullish scenario: Euro rally to 1.22–1.28

Germany stabilizes, stimulus is quickly implemented, France relaxes. Eurozone growth reaches 2% (transformative). The ECB signals rate hikes for 2027, pushing the euro further. On the US side: inflation remains stubborn, labor market weakens, stagflation threatens. Trump’s criticism of the Fed intensifies. Foreign investors massively reduce US positions. EUR/USD breaks through 1.20 and moves toward 1.22-1.28.

Practical guidelines for traders

An event-driven, flexible approach is recommended. Critical dates:

• Germany: 2026 state elections, stimulus implementation dates
• USA: Powell successor appointment (May 2026), economic data
• France: Budget negotiations and political stability
• Eurozone: ECB meetings and inflation data

The conditions are highly dynamic. Risk management is paramount, as how the dollar develops remains highly event-dependent.

Risks often underestimated

Germany’s political tinderbox: A grand coalition dysfunction is not just a theoretical risk but a realistic probability. The investment package could stall.

Geopolitical shocks: Escalation in Ukraine or a second energy crisis would massively favor the USD. Europe’s energy diversification is advanced but not immune.

US resilience exceeded: AI productivity gains of 2-3% annually could secure the US’s structural superiority. Low taxes, cheap electricity, and tech dominance make the US an unbeatable location.

Conclusion: Volatility with downside risks

The EUR/USD pair in 2026-2027 is in a power field of antagonistic factors. The interest divergence creates a floor at 1.10-1.12. USD overvaluation (23%) and capital flow reversals support the euro. But political fragmentation in Germany, structurally high energy costs, and US economic strength cast shadows. How the dollar ultimately develops will depend on three questions: Can Germany achieve political stabilization after 2026? Will the stimulus work despite obstacles? Will America’s economy remain resilient? The next 24 months will decide whether a new era of euro dominance begins – or whether the dollar re-establishes its supremacy impressively.