Where Will EUR/USD Trade in 2026? Three Angles to Watch ECB Inaction and Fed Rate Cuts

The euro’s 2026 journey hinges on a simple but potent dynamic: if the Federal Reserve keeps cutting while the European Central Bank holds the line, the currency pair EUR/USD becomes a race between narrowing rate differentials and diverging economic resilience. Markets are currently pricing two opposing endpoints—a push toward 1.20 if Europe stabilizes and the Fed delivers multiple cuts, or a retreat toward 1.13 (and potentially 1.10) if growth falters and policy shifts. The question isn’t just about rates anymore; it’s about which economy can sustain momentum when tariffs loom and growth cycles diverge.

The Fed’s 2026 Cut Cycle Is Already Locked In

The Federal Reserve delivered three rate cuts in 2025—exceeding its own December 2024 forecast of two moves. After holding steady through early spring due to tariff concerns, the Fed cut 25 basis points in September, then again in October and December, bringing the federal funds target range to 3.50%–3.75%. For 2026, the consensus among major institutions is remarkably consistent: Goldman Sachs, Morgan Stanley, Bank of America, Wells Fargo, Nomura, and Barclays are all positioning for two additional cuts, which would push rates toward the 3.00%–3.25% zone.

The political backdrop adds another layer. Jerome Powell’s term expires in May 2026, and Treasury Secretary nominee Scott Bessent—who has overseen Fed chair candidate screening—has openly signaled support for continued monetary accommodation. Economists at Moody’s and major investment banks increasingly expect a “delicate balance” scenario for 2026: not robust growth, but enough activity to justify the Fed’s easing bias and potentially accelerate the cutting cycle beyond consensus expectations.

ECB: Patience Is the Policy, At Least for Now

By contrast, the European Central Bank has entered a holding pattern. Its key rate remains anchored at 2.15% since July, with all three policy rates—the deposit facility (2.00%), main refinancing rate (2.15%), and marginal lending facility (2.40%)—kept unchanged through December.

That pause makes sense when you examine the Eurozone’s inflation picture. Eurostat data show inflation rising to 2.2% year-on-year in November from 2.1% in October, persistently above the ECB’s 2.0% target. More importantly, services inflation jumped to 3.5% from 3.4%, the kind of sticky price pressure that keeps central bankers awake. ECB President Christine Lagarde described policy as being in a “good place” after the December meeting—central bank speak for “no rush to move either direction.”

Market consensus reflects that stance. A Reuters poll found most economists expect the ECB to maintain rates throughout 2026 and 2027, though confidence deteriorates the further out forecasters venture. If anything shifts in 2026, strategists like Union Investment’s Christian Kopf argue a hike is more likely than a cut, and that timing would probably land in late 2026 or early 2027 at the earliest.

Growth Weakness and Trade Shock: The Third Angle

Here’s where the analysis gets complicated. Eurozone growth is decelerating, but not collapsing. Q3 expansion came in at 0.2%, though Spain (0.6%) and France (0.5%) outpaced Germany and Italy, which were flat. The European Commission’s autumn projections now pencil in 1.3% growth for 2025, 1.2% for 2026, and 1.4% for 2027—a notable downward revision for 2026 compared to earlier expectations.

The culprits are structural and cyclical. Germany’s automotive sector has contracted 5% due to EV transition disruptions and supply-chain friction. Underinvestment in technology has left the Eurozone trailing the US and China in key digital segments. Most acutely, tariff risk has returned to the table. The Trump administration’s “reciprocal tariff” framework has raised the specter of 10%–20% levies on EU goods, with exports to the US already showing signs of weakness—a 3% decline with autos and chemicals absorbing the heaviest damage.

This third angle—trade policy as an independent variable—matters because it directly shapes EUR/USD’s path. It’s not just about rate differentials anymore; it’s about whether Europe can maintain current growth trajectories while absorbing a potential external shock.

EUR/USD: Which Scenario Wins?

The currency pair’s 2026 range ultimately depends on which forecast framework proves correct. Two contrasting scenarios capture the debate:

Bull case for the euro: If Eurozone growth holds above 1.3% and inflation edges up gradually, the ECB stays patient while the Fed cuts 50+ basis points. The yield gap narrows, but not catastrophically, and EUR/USD probes above 1.20. UBS Global Wealth Management takes this view, expecting the pair to rise toward 1.20 by mid-2026 on the assumption of stable European growth meeting accommodative Fed policy.

Bear case for the euro: If Eurozone growth disappoints (below 1.2%), trade shocks bite harder than expected, and the ECB eventually shifts toward cuts, EUR/USD retreats toward the 1.13 support zone or even tests 1.10. Citi projects this outcome, forecasting 1.10 by Q3 2026—roughly a 6% decline from current levels around 1.1650—on the thesis that US growth re-accelerates while the Fed cuts less aggressively than priced.

The market’s current pricing essentially splits the difference between these poles. The decisive variable isn’t policy; it’s growth. If Europe muddles through 2026 without a recession while the Fed continues its easing cycle, the euro has structural support. If tariffs prove more disruptive than consensus assumes and the Eurozone slips into stagnation, the ECB’s policy patience becomes irrelevant—the euro falls anyway because the economic fundamentals have shifted.

For traders, 2026 is shaping up as a year where macro resilience, not just rate math, will drive EUR/USD. Watch Eurozone PMI data, US tariff implementation timing, and ECB communication closely. The third angle—geopolitical and trade risk—may matter as much as traditional monetary policy divergence.