What Does 2026 Hold for EUR/USD? Fed Easing vs. ECB's Wait-and-See Game

The biggest question hanging over the euro in 2026 isn’t just policy—it’s the meaning behind it. The Fed has already cut three times in 2025, sitting at 3.5%–3.75%, and major banks expect two more cuts next year, potentially landing at 3.00%–3.25%. The ECB, meanwhile, has barely moved since July, holding its main rate at 2.15%. That divergence is the whole ball game for EUR/USD traders.

The Policy Backdrop: Why Easing Matters

When we talk about Fed easing in 2026, we’re not talking about panic cuts—we’re talking about policy normalization in a “delicate balance” economy. Jerome Powell’s term ends in May, and his successor is likely to maintain or accelerate the dovish tone. Goldman Sachs and Morgan Stanley both pencil in cuts for March and June respectively. Nomura goes even further, expecting June and September cuts.

The ECB’s meaning is the opposite: patience. With inflation creeping back above target at 2.2% (up from 2.1% in October), and services inflation showing stickiness at 3.5%, the central bank has little reason to rush. President Christine Lagarde called policy “in a good place”—Wall Street shorthand for “we’re done moving.” Most economists polled by Reuters expect rates to stay put through 2026 and 2027.

That creates a widening rate gap: if the Fed eases another 50–75 bps while the ECB stays frozen, what happens to the euro?

Eurozone Growth: Slow, But Not Broken

Here’s where it gets tricky. The Eurozone expanded just 0.2% in Q3, but Spain and France posted 0.6% and 0.5% respectively—Germany and Italy flatlined. The European Commission’s autumn forecast sees 1.3% growth in 2025, dipping to 1.2% in 2026, then rebounding to 1.4% in 2027.

That’s not collapse; it’s just grinding. Germany’s auto sector is down 5% due to the EV transition. Innovation lags the US and China. And now trade friction is creeping back—the Trump administration’s reciprocal tariff approach has flagged potential 10–20% levies on EU goods, with EU exports to the US already down 3%.

The baseline: European economies can muddle through, but there’s no room for policy error.

The EUR/USD Split Screen

Two scenarios dominate bank forecasts:

Scenario 1: Fed eases, Europe holds—euro strengthens

If Eurozone growth stays above 1.3% and inflation cooperates, the ECB stays parked while the Fed cuts 50+ bps. UBS Global Wealth Management’s base case: EUR/USD rises to 1.20 by mid-2026. The yield gap compresses, but growth differentials favor holding euros.

Scenario 2: Growth disappoints, trade shock bites—euro weakens

If 2026 brings slower growth, tariff headwinds bite, and the ECB feels forced to ease, EUR/USD slides back toward 1.13 support. Citi’s bearish call takes it even lower—projecting 1.10 in Q3 2026, roughly a 6% drop from current 1.1650 levels. Their thesis: US growth accelerates while the Fed cuts less than markets price in.

What This Means for Traders

The easing meaning cuts both ways. Yes, the Fed’s dovish bias should typically weaken the dollar. But if growth concerns spike Europe faster than America, that narrative flips. The euro is no longer a “buy the dip” story—it’s a “show me the data” play.

Watch three things in early 2026: Eurozone Q4 GDP revisions, whether services inflation sticks above 3%, and the first Fed cut timing under the new administration. Any one of those could shift EUR/USD from 1.20 territory down toward 1.13 fast.