The monthly chart is in an uptrend with the 12-month moving average at 1.13115 providing support and guidance. This puts 1.19188 on the radar as the trigger point for an acceleration into the multi-year high at 1.23496 in 2026.
Forces Reshaping the Dollar-EUR Balance
U.S. Exceptionalism Is Losing Momentum
After years of outperformance, the U.S. economy is cooling. Manufacturing PMIs have been in contraction for nine months, services activity is slowing, and policy uncertainty around tariffs and regulation has weighed on investment. The long shutdown further dampened Q4 output and delayed critical statistical releases, reducing market visibility into economic conditions.
The key shift: the U.S. is no longer clearly outgrowing the eurozone, a major break from the 2020–2024 narrative that supported the dollar.
ECB Nears the End of Its Cutting Cycle
The ECB has already lowered the deposit rate to 2.0%, and President Christine Lagarde signaled that policy is “in a good place.” With the Fed expected to continue easing while the ECB pauses, rate differentials should narrow in the euro’s favor.
Eurozone fundamentals are also improving. Germany’s €500 billion infrastructure program is set to lift investment and offset years of under-spending. J.P. Morgan forecasts 1.5% eurozone growth in 2026, up from 0.9% in 2025. As Europe regains cyclical traction, capital inflows should strengthen.
Capital Reallocation Is Now a Structural Theme
Years of concentrated positioning in U.S. tech and high-beta assets have left global portfolios overweight dollars. With U.S. valuations stretched and economic momentum softening, investors are rotating toward regions offering better risk-adjusted returns.
European equity funds have returned to net inflows for the first time since 2021, and currency-adjusted performance is increasingly favorable for non-dollar investors. This reallocation requires buying euros, reinforcing structural demand for the currency through 2026.
Risks to the Bullish Euro View
A constructive EURUSD outlook rests on several assumptions:
- U.S. Data Does Not Reaccelerate.
If growth surprises to the upside, the Fed could pause its cutting cycle earlier than markets expect, extending the dollar’s yield advantage. - European Politics Do Not Deter Capital.
France remains a swing risk, and prolonged political uncertainty could slow foreign investment. Wells Fargo’s alternative scenario sees EURUSD falling back toward 1.12 if U.S. resilience outperforms expectations. - Geopolitics Do Not Trigger a Dollar Safety Bid.
Trade tensions or fresh tariff implementations could send investors temporarily back into the dollar, even if fundamentals argue for medium-term weakness.
Conclusion: Euro Strength Still the Base Case for 2026
Across the institutional landscape, the euro’s constructive outlook rests on aligned monetary conditions, moderating U.S. growth, and an improving relative macro story in Europe. With the Fed expected to continue easing while the ECB nears its terminal rate, yield spreads should compress in favor of the euro throughout 2026.
Coupled with structural capital redeployment away from the U.S. and a gradual improvement in eurozone demand, the balance of evidence supports EURUSD rising into the low-1.20s by year-end. Upside toward 1.25 is plausible if European political risks fade and global growth stabilizes.
For traders and corporate hedgers, 2026 is shaping up as a year defined by dollar softness, with implications for carry strategies, earnings translation, cross-border flows, and global risk allocation.
More Information in our Economic Calendar.
