EUR/USD 2026-2027: Between Interest Rate Gap and European Risks – Where Does the Path Lead?

The euro appreciation in 2025 sparks discussions among market participants. The EUR/USD exchange rate rose from 1.04 USD in January to 1.16 USD in November – an increase of 13.5% within a year. But whether this movement will hold or is just a pause in a longer-term downtrend remains an open question. This analysis explores the prospects for the coming years.

Scenario Overview: Three Possible Development Paths

Optimists target EUR/USD 1.22–1.28

The upside scenario assumes that Germany stabilizes and the 500-billion infrastructure package quickly takes effect. A GDP growth of 2% in the Eurozone would fundamentally change perceptions. Meanwhile, the US could face stagflation: persistent inflation, a weak labor market, and intense political debates over Fed independence (especially around the Fed Chair change in May 2026). Under these conditions, the EUR/USD rate breaks through the 1.20 mark and could rise to 1.28.

Baseline: EUR/USD fluctuates between 1.10 and 1.20

In the middle scenario, bullish and bearish factors balance out. The interest rate differential between the Fed and ECB supports the euro and sets a floor at 1.10–1.12. European risks limit upside potential at 1.18–1.20. Germany shows mixed results – the stimulus is partially effective but also creates inefficiencies. The US economy grows moderately (1.8–2.2% per year) without recession. Investors buy on weakness below 1.12 and sell on strength above 1.18.

Pessimists fear EUR/USD 1.05–1.10

The downside scenario envisions a German-European crisis: in the 2026 federal election, the AfD strengthens its position, the grand coalition becomes unstable, and the stimulus package stalls. German bond spreads widen, France’s fiscal crisis escalates, and the ECB must respond by lowering key interest rates. Simultaneously, the US surprises positively – the AI boom boosts productivity, inflation falls to 2%, and the Fed remains at 3.50%. Then, EUR/USD falls to 1.08–1.10 or even tests the 1.05 level.

The Foundation: Interest Rate Differential as the Strongest Euro Support

The differing monetary policies are the key element behind any euro-strength thesis. The Fed cut interest rates in September and October 2025 by a total of 50 basis points and signals further reductions to 3.4% by the end of 2026. The ECB has already completed its easing cycle – the deposit rate has been steady at 2.0% since June.

The mechanics are well known: when US rates fall and euro rates remain stable, the interest rate gap narrows. Capital flows increasingly into euro assets, leading to currency appreciation. Historically, a 100 basis point narrowing in the interest rate differential results in a 5–8% currency adjustment. This would lift EUR/USD from 1.16 to 1.22–1.25.

Some analysts expect the ECB might even signal rate hikes in 2027 if the German stimulus shows clear results. Such a move would significantly increase upward pressure on the euro.

USA: Stability Factors Overlap Debt Risks

The second Trump administration shows a mixed record – overall, with positive surprises for the US economy. GDP growth reached a strong 3.8% in Q2 2025, driven by massive investments in the AI sector.

Trade policy as negotiation theater

The “Liberation Day” on April 2 announced tariffs up to 145% and caused a stock market crash. After a 90-day pause, moderate rates of 15–18% were set – well below maximum demands but above historical averages. Trump achieved that trading partners made investment commitments worth billions to reduce their tariff burdens. This stimulated the domestic economy: TSMC is building three chip factories in Arizona (165 billion), Samsung invests 44 billion in Texas, Intel expands in Ohio (20 billion).

Tax reform and structural advantages

The permanent codification of tax cuts (corporate tax remains at 21%) attracts capital. Combined with low energy costs and technological dominance, this creates a structural location advantage for the US. However, debt levels are rising: the deficit will reach about 6% of GDP in 2026. Trump’s criticism of Fed independence worries international investors.

Eurozone: Hopes and Pitfalls

German stimulus – promises and reality

The German 500-billion infrastructure package is portrayed as a game-changer. In reality, effects could be disappointing:

Energy costs as a structural obstacle

German electricity prices for households are 30–35 cents/kWh, for industry 15–20 cents/kWh – two to three times higher than in the US. An infrastructure program alone won’t change that. The planned industrial electricity prices of 5 cents/kWh for 2026–2028 only address symptoms. Energy-intensive industries (chemicals, steel, semiconductors) will remain unattractive long-term; already relocated companies won’t return.

Implementation delays

German infrastructure projects take on average 17 years from planning to completion. The construction industry reports 250,000 open positions. These inefficiencies are likely to significantly reduce the expected multiplier effects of the stimulus.

Military spending benefits the US

Parts of defense spending flow into US systems (F-35, Patriot, Chinook). This stimulates the US economy more than Germany’s.

Political risks in election campaigns

The 2026 state elections could make the AfD the strongest party in several federal states (polls: ~25% nationwide). This would limit political maneuverability and increase financing costs for German government bonds.

France: Instability remains the central risk

France faces a political crisis (October 2025: government collapse within 24 hours), a deficit of about 6% of GDP, and a debt ratio of 113%. French bonds yield higher than Spanish – a clear warning sign.

Eurozone: Growth remains weak

Eurozone grew only 0.2% quarter-on-quarter in Q3 2025 (annualized: 1.3%) – far behind the US (3.8% in Q2). For 2026, only 1.5% is expected. A bright spot: inflation is at 2.0% (ECB target), and the unemployment rate is 6.3%. This gives the ECB room to keep rates stable – but at what cost?

If the German stimulus works fully, inflation could pick up, forcing the ECB to react. But rate hikes are not in the interest of highly indebted countries. The ECB faces a dilemma: either inflation or debt crisis. The TPI instrument could help, but it requires cooperation among all affected countries – which is currently lacking.

Bank Survey: Majority Bullish but with Limits

Most major banks expect EUR/USD appreciation in 2026. The forecast ranges are quite narrow:

For 2027, a similar picture with a wider range:

Most institutions remain bullish. Wells Fargo is an outlier, expecting a depreciation back to 1.12.

Technical Indicators

EUR/USD rose from the twenty-year low of 1.0243 (Jan 12) to a high of 1.1868 (Sep 16) – a range of over 1,600 pips, showing enormous volatility. Currently, the pair consolidates around 1.16.

Supports: 1.1550 and 1.1470. A break below 1.15 would challenge the bullish narrative and open targets at 1.10–1.12.

Resistances: 1.1800–1.1920. A sustained break above 1.20 would pave the way to 1.22–1.25.

Trading in Uncertainty: Three Critical Events

For traders, flexibility is key. Important milestones next year:

• German state elections: critical for reform capacity
• Powell succession (May 2026): signals Fed independence or not
• France budget updates: escalation or stabilization
• German stimulus data: shows implementation pace
• US economic data: confirms resilience or weakness

Conditions are constantly changing. Risk management and adaptability are essential.

Critical Risks: What is Often Underestimated

1. Underestimating Germany risk: The probability of grand coalition problems is high. The stimulus effect could be much weaker than hoped.

2. Geopolitical shocks: An escalation in Ukraine or a new energy crisis would push capital into the dollar. Europe’s energy diversification is advanced but not immune.

3. US productivity gains: The AI boom could bring 2–3% annual productivity increases. Low taxes, cheap energy, and technological dominance make the US extremely attractive for global companies.

Conclusion: Outlook Remains Volatile with Pitfalls

The EUR/USD rate in 2026–2027 faces conflicting signals. The interest rate differential creates a floor at 1.10–1.12. The dollar is overvalued by 23%, and capital flow reversals favor the euro.

At the same time, political fragmentation in Germany (Election risk 2026), high structural energy costs, and US economic strength (AI boom, tax reform) raise significant doubts.

The outcome depends on whether Germany stabilizes politically after the election, the stimulus works despite structural hurdles, and the US economy maintains resilience. Only then will it become clear whether the euro will enter a sustainable strength phase – or if the dollar will convincingly regain its dominance.