Persistent geopolitical volatility, including the war in Ukraine, tensions with China, trade, and tariffs, all favor the US dollar. The crazier things get, the better it is for the US dollar.
Bullish Scenario for 2026
There are a couple of scenarios to consider. The bullish scenario for the euro is the lower probability outcome. You would need to see US growth slow significantly, and the Fed would have to cut rates faster than anticipated. That seems unlikely. In fact, I think the US growth starts to accelerate again. The eurozone would need to avoid a recession and stabilize, and you would need a major risk-on environment. Even then, foreigners buying US companies would still have to convert euros or yen into US dollars, creating a feedback loop. If we do break out, a move above 1.20 would likely be sustainable to the upside, but it would be very choppy. It would not be a straight line higher.
Bearish Scenario for 2026
The bearish scenario is the higher probability outcome. There is about a two-thirds to 70% chance that US dollars will remain in more demand. US growth remaining resilient will fuel that, and consumer spending in the United States remains strong. As the consumer goes, so goes the US economy.
The ECB could be forced to cut rates a bit more aggressively. If they cut again, that would be a negative signal. Capital flows continue to favor US assets, and that does not appear likely to change anytime soon. Global uncertainty continues to drive US dollar demand.
The most likely scenario for the euro against the US dollar over the next year is choppy volatility. The euro may drift lower with occasional volatile spikes to the upside. That leads to more short-term or swing-trading approaches, smaller position sizing, and fading rallies into resistance.
A Couple of Levels to Watch
The area between 1.18 and approximately 1.20 is a significant overhang. If we break above 1.20, the euro should continue higher in a choppy manner. Otherwise, fading rallies and potentially targeting 1.14 could be a theme in the first or second quarter of 2026. A move back to 1.02 seems unlikely, but occasional shakeouts are possible.
Macroeconomics and fundamentals are starting to favor the US dollar again. After the impulsive move earlier in the year, this pair has done nothing of note for six months, remaining in a roughly 400-pip range. Watch the 1.20 level, the pace of Federal Reserve easing, and whether the ECB cuts again. Calling this pair choppy next year is not a stretch. If you look at the history of the euro, that is exactly what it does most of the time.
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