EUR/USD in 2026-2027: Structural Confrontation Between the Dollar and the Euro

Dollar and Euro Power Comparison is experiencing a historic shift in 2025. The Euro soared from $1.04 at the beginning of the year to $1.16, a 13.5% increase — this is not just a technical rebound; it hints at deep structural economic changes behind the move. But can this rally continue into 2026 and 2027? The answer is far more complex than it appears on the surface.

Technical Framework: Where Is the Critical Point for EUR/USD?

From a technical perspective, EUR/USD is at a crucial juncture. After hitting a 20-year low of 1.0243 at the start of the year, the Euro broke through its long-term downtrend since 2014 in April, reaching an intra-year high of 1.1868 in September. Currently, it is consolidating around 1.16.

Support levels: 1.1550 and 1.1470 form the first line of defense. Falling below 1.15 would seriously challenge the bullish thesis and could open a downward move toward 1.10-1.12.

Resistance levels: 1.1800-1.1920 constitute a key resistance zone. A sustained break above 1.20 would open the door to 1.22-1.25.

The fluctuation from 1.0243 to 1.1868 exceeds 1,600 points, reflecting significant disagreement among market participants about the future direction of EUR/USD.

The Real Reasons Behind Dollar Weakening: The Power of Interest Rate Differentials

The policy divergence between the (Federal Reserve) and the European Central Bank(EZB) has become the core driver of Euro strength in 2025.

The Fed has cut interest rates by a total of 50 basis points in September and October 2025, with the federal funds rate currently at 3.75-4.00%. Markets expect further rate cuts to around 3.4%, maintaining an easing cycle throughout 2026.

In contrast, the ECB announced the end of its rate-cutting cycle in June, keeping the deposit rate at 2.00%. ECB officials have repeatedly expressed satisfaction with current policy, making further rate cuts unlikely.

What does this mean? As the interest rate gap narrows, arbitrage and capital flows will automatically adjust exchange rates. If US rates continue to decline while Euro rates stay stable, capital will keep flowing into Euro assets. Historical data shows that a 100 basis point narrowing in the interest rate differential typically corresponds to a 5-8% currency depreciation; by this logic, EUR/USD could rise to 1.22-1.25.

More aggressive analysts even suggest that if Germany’s stimulus policies prove effective, the ECB might start raising rates before the Fed in 2027 — further strengthening the Euro.

Trump’s Economic Policies: A Double-Edged Sword — Growth or Risks?

The economic record of the Trump 2.0 administration presents a complex picture. US GDP grew strongly at 3.8% in Q2 2025, driven mainly by AI investment booms. But whether this momentum can be sustained remains fundamentally uncertain.

The Truth About Tariff Wars

The “D-Day”( on April 2, with 145% tariffs announced, triggered a stock market plunge. But a foreseeable turning point soon followed: a 90-day suspension agreement was reached. This aligns with Trump’s typical approach — making extreme demands, then compromising and claiming victory.

The current average tariff level is 15-18%, lower than initial threats but still above the previous administration’s levels. The key point is: the US gained massive investment commitments from partners like the EU and Japan through tariff negotiations, directly supporting US economic growth.

) The Multiplier Effect of Tax Reform and AI Boom

The “One Big Beautiful Bill Act”### in July made the 2017 tax reform permanent, maintaining corporate tax at 21%. Coupled with low energy costs, this has attracted global capital inflows:

• TSMC is building three chip factories in Arizona with a $165 billion investment
• Samsung is investing $44 billion in Texas
• Intel is expanding in Ohio with a $20 billion investment

However, concerns exist: US fiscal deficit is projected to reach about 6% of GDP in 2026, with record debt levels potentially eroding Dollar’s long-term attractiveness. Trump’s frequent attacks on Federal Reserve independence are also undermining international investor confidence.

Ironically, Trump’s policies to weaken the Dollar have already achieved their goal — by 2025, the Dollar has depreciated over 10% against the Euro. But whether this policy-driven depreciation can be sustained long-term remains uncertain.

Germany’s Stimulus: Three Major Traps

The €50 billion, 12-year infrastructure fund is widely seen as a “game changer” for the Eurozone. But reality may be more complicated.

( The Energy Cost Gap

German household electricity prices are 30-35 euro cents per kWh, industrial prices are 15-20 euro cents, which is 2-3 times higher than in the US. Plus, a three-year industrial electricity subsidy) of 5 euro cents per kWh### is in place, but these measures cannot fundamentally alter structural disadvantages.

For energy-intensive industries like chemicals, steel, and semiconductors, Germany remains less competitive in the medium to long term. Moved production capacity is unlikely to return, and new stimulus funds may not be effectively utilized — directly weakening the multiplier effect.

( Implementation Bottlenecks

German infrastructure projects take an average of 17 years from planning to completion, with permit procedures taking 13 years. The construction sector reports 250,000 job vacancies. This means that even with sufficient funding, physical implementation capacity is a bottleneck.

By the time stimulus measures produce real economic effects, it may be 2028-2029, by which time the industrial landscape will have already changed.

) Geopolitical Risks

German defense spending### especially in the “special assets”### part of the budget, will be used to purchase US-made equipment like F-35s and Patriot missile systems. This effectively stimulates the US economy rather than Germany’s, weakening the support for the Euro from the investment package.

( The Political Minefield of the 2026 Elections

State elections in 2026 show that the far-right AfD) has about 25% support nationwide, potentially becoming the largest party in some states. This could paralyze the grand coalition government, threatening the implementation of stimulus plans. The widening of German government bond spreads will raise financing costs, further weakening policy effectiveness.

France and the Eurozone: The Cost of Political Fragmentation

France’s difficulties are increasingly evident. The government collapsed within 24 hours in October, with a budget deficit of 6% of GDP and debt-to-GDP ratio at 113%. More alarming is that French bond yields are higher than Spain’s — which should not happen.

Eurozone economic growth in Q3 2025 was only 0.2% quarter-on-quarter, with an annualized rate of just 1.3%, far below the US’s 3.8% in Q2. The 2026 growth forecast is only 1.5%, depending on the strength of German stimulus.

Positive signals: Inflation has fallen to 2.0%### in line with ECB targets(, and unemployment is at 6.3%. This provides room for the ECB to keep rates stable.

Potential pitfalls: If German stimulus policies are too effective, they could push inflation higher, forcing the ECB to hike rates. But high-debt countries will struggle to bear rising interest rates. The ECB faces a dilemma — either tolerate higher inflation or trigger a debt crisis. While the ECB’s transmission tools)TPI( could theoretically address fragmentation, they require cooperation from member states, which currently lacks political will.

Consensus and Divergence Among Bankers

Regarding the 2026 end-year outlook for EUR/USD, major institutions are relatively aligned, expecting Euro to continue appreciating:

Forecasts for 2027 show clear divergence, indicating high uncertainty in the long-term outlook:

The gap between 1.30 (Deutsche Bank) and 1.12 (Wells Fargo) reflects very different assessments of the Eurozone’s fundamentals and US resilience.

Three Possible Future Paths

) Base Scenario: Fluctuation between 1.10 and 1.20

In this scenario, opposing factors offset each other. Euro interest rate differentials support levels below 1.12, while European risks limit upside potential at 1.18-1.20.

Germany achieves some stimulus effects but also risks slipping. The US avoids recession but grows only 1.8-2.2%. Investors buy on dips at 1.10-1.12 and sell on rallies at 1.18-1.20. Most of the time, EUR/USD will oscillate between 1.14 and 1.17.

( Bear Scenario: German crisis triggers Euro collapse to 1.05-1.10

State elections see a major victory for AfD, leading to paralysis of the grand coalition and hindering stimulus implementation. German bond spreads widen sharply, France’s fiscal crisis worsens, and the ECB is forced to cut rates again.

Meanwhile, the US economy outperforms expectations: AI-driven productivity boosts, inflation drops to 2%, and the Fed can pause near 3.50%. As a result, EUR/USD falls to 1.08-1.10, possibly touching 1.05.

) Bull Scenario: Euro surges past 1.22 toward 1.28

Germany’s political stability leads to rapid release of stimulus funds, with growth reaching 2%, a revolutionary development for the Eurozone(. France’s situation stabilizes. The ECB signals rate hikes in late 2026, strengthening the Euro in anticipation of 2027.

Meanwhile, the US faces difficulties: persistent inflation, weakening labor markets, rising stagflation risks. Trump’s interference with the Fed intensifies, and Powell’s successor) to be appointed in May 2026### faces independence pressures. Large capital outflows from US assets occur. EUR/USD first breaks above 1.20, then moves into the 1.22-1.28 range.

Key Events for Practical Trading

Given the uncertainty in EUR/USD outlook, event-driven strategies are more effective than fixed directional bets. Key points to watch in 2026 include:

• German state elections and subsequent government formation negotiations
• The appointment of the Fed Chair###Powell’s successor in May###
• Developments in France’s fiscal situation
• The pace of German stimulus fund expenditure data releases
• Turning points in US macro data such as employment and inflation

As both the Eurozone and US are evolving rapidly, risk management must be central to investment decisions. Strict stop-loss and position management are more critical than directional forecasts.

Underestimated Risks in EUR/USD Trading

The severity of German political risks is often underestimated by analysts. The dysfunction of a grand coalition is not just a theoretical hypothesis but a high-probability event, which would directly undermine stimulus effectiveness.

Geopolitical shocks could occur suddenly. Escalation in Ukraine or a new energy crisis could swiftly drive capital into safe-haven dollars. Europe’s energy diversification has progressed but remains vulnerable to new shocks.

US resilience may be underestimated. The productivity gains from AI( at an annual rate of 2-3%) could confer a lasting structural advantage. A combination of low taxes, cheap energy, and technological leadership makes the US attractive for global companies over the long term.

Summary: Dynamic Equilibrium in Structural Opposition

EUR/USD in 2026-2027 stands at a crossroads of multiple structural forces. Interest rate differentials set a lower support at 1.10-1.12, while the dollar’s overvaluation(23%) and potential reversal of capital flows should theoretically favor the Euro.

However, risks like German political fragmentation(2026 elections), Europe’s structural energy disadvantages, and the US’s robust economy(AI, tax reforms) cast long shadows.

The key question is: Can Germany restore political stability after the 2026 state elections? Will stimulus funds break through structural barriers to generate real growth? Can the US sustain its current growth momentum?

The answers to these questions will determine whether the Euro can establish a new strong position — or whether the Dollar will reassert its absolute dominance. Until these issues are resolved, flexibility and adaptability remain the trader’s greatest assets.