EUR/USD 2026-2027: The euro at a crossroads, you need to see this market forecast

This year’s performance of the euro has been quite intense—rising from $1.04 at the beginning of the year to $1.16, an increase of over 13%, directly breaking a decade-long downward trend. But the question is: can this rally continue?

Quick Overview: Euro Breaks Through Long-Term Resistance

EUR/USD rose from a low of 1.0243 in January to a high of 1.1868 in September. Although it has now retraced to around 1.16, the technical outlook has indeed broken the weak pattern since 2014.

Short-term support levels are at 1.1550 and 1.1470. If it falls below 1.15, the previous gains are likely to be wiped out, possibly returning to 1.10-1.12. Conversely, if it can stabilize above 1.20, there’s potential to push further toward 1.22-1.25.

Who is Driving the Euro Higher?

Interest rate differentials are key. The Federal Reserve is still cutting rates (from 3.75-4.00% down toward 3.4%), but the European Central Bank has paused, maintaining deposit rates at 2.0%. When the gap between the two central banks’ rates narrows, currencies tend to appreciate to balance the difference—that’s the core logic behind the euro’s rise.

Historically, a 100 basis point change in interest rate differentials can lead to a 5-8% adjustment in the exchange rate, meaning EUR/USD could rise from 1.16 to 1.22-1.25. Some analysts even believe that if Germany’s economy truly gets stimulated, the ECB might start raising rates earlier than the Fed—making the euro even stronger.

The US economy is unexpectedly resilient. Since Trump took office, AI investments, tax cuts, and foreign investment commitments have supported the dollar. US GDP growth in Q2 reached 3.8%, well above expectations. But the cost is soaring US debt, with deficits possibly reaching 6% of GDP by 2026.

Hidden Risks in Europe: Looks Good but Fragile

Germany announced a €500 billion, 12-year infrastructure plan, widely praised. But reality may be less optimistic:

Energy costs are too high. Industrial electricity prices in Germany are 2-3 times those in the US. No matter how much infrastructure is invested, this reality won’t change. Even with subsidies for industrial electricity from 2026-2028, the long-term energy disadvantage persists, continuing to attract manufacturing outflows.

Construction cycle is too long. On average, it takes 17 years from planning to completion for German infrastructure projects, with 13 years just for approval. Plus, the construction sector faces a shortage of 250,000 workers. This inefficiency significantly dampens the effectiveness of stimulus policies.

Political risks are very real. In the 2026 state elections, far-right parties are polling close to 25%. If the federal political landscape shifts, the government’s ability to implement policies could decline sharply. This is not alarmism—political uncertainty could push up German bond yields, increasing the cost of the entire stimulus plan.

France’s situation is even worse. The government collapsed within 24 hours in October, with a deficit of 6% and debt at 113%. French bond yields have already surpassed Spain’s—an alarm signal. The entire eurozone’s Q3 growth was only 0.2% quarter-over-quarter (annualized 1.3%), far below the US at 3.8%.

What Does Wall Street Think?

By the end of 2026, major banks generally agree on a bullish EUR/USD forecast: all see 1.25. Morgan Stanley, BNP Paribas, Goldman Sachs all predict 1.25; JP Morgan and ING forecast 1.22-1.25; even the relatively conservative Wells Fargo sees 1.18-1.20. The reasons are interest rate differentials, an overvalued dollar, and shifting capital flows.

By 2027, divergence begins to appear. Deutsche Bank is the most aggressive, calling for 1.30; Morgan Stanley at 1.27; but Wells Fargo has a contrarian view at only 1.12—they argue that the Fed will stop cutting rates, the US economy will rebound, and structural issues in the eurozone remain unresolved.

Three Scenarios, Three Outcomes

Central scenario (most likely): EUR/USD oscillates between 1.10-1.20. Interest rate differentials support the euro, but rising European risks limit upside. Germany’s stimulus effects are moderate, US growth remains steady at 1.8-2.2%. Buying around 1.10-1.12 and selling at 1.18-1.20, with most trading in the 1.14-1.17 range.

Bearish scenario: After the 2026 state elections, Germany’s political gridlock causes stimulus plans to fail, German bond yields soar. France’s debt crisis worsens, forcing the ECB to cut rates again. Meanwhile, the US surprises with AI-driven productivity gains, inflation drops to 2%, and the Fed remains steady at 3.5%. EUR/USD falls to 1.08-1.10, possibly testing 1.05.

Bullish scenario: Germany resolves its political issues, stimulus policies proceed smoothly, and GDP growth hits 2% (a huge success for the eurozone). The ECB hints at rate hikes starting in 2027. Meanwhile, the US faces difficulties—sticky inflation, weak employment, stagflation—Trump increases pressure on the Fed, and foreign capital flees US assets. EUR/USD breaks above 1.20, entering the 1.22-1.28 range.

Risk Checklist

Political black swan: Unpredictable 2026 German elections could lead to fragmentation, severely impairing decision-making.

Geopolitical escalation: Escalation of Ukraine conflict or energy crises could directly boost safe-haven demand for the dollar.

US resilience underestimated: AI-driven productivity gains could give the US a 2-3% structural growth advantage, and low taxes and cheap energy might attract more multinational companies than expected.

How to Trade This Market?

Given the high uncertainty, a flexible, event-driven strategy is recommended rather than one-way bets:

Pay attention to key 2026 events—German state elections, Fed chair change (Powell stepping down in May), French budget developments, and US economic data. These events will offer opportunities to reposition.

Risk management is crucial. Don’t chase after moves just because they go up; EUR/USD now is like a house full of gunpowder—one spark can change everything. Set reasonable stop-losses and avoid betting everything on a single scenario.

Overall, while the euro has broken its long-term weakness, how far it can go depends on whether Europe can resolve its political fragmentation and structural issues—both of which have no quick fixes. The US economy looks stronger, but exploding debt and Fed independence doubts are ticking time bombs. The EUR/USD in 2026-2027 will be exciting but also highly unpredictable.