EUR/USD Outlook for 2026-2027: Can the Euro Continue Its Strong Rally?

Euro Creates History, but the Road Ahead Is Full of Uncertainty

Entering 2025, the performance of the euro against the US dollar has been remarkable. From the beginning of the year at 1.04 USD, it has risen to 1.16 USD, an increase of 13.5%. This not only breaks the prolonged depreciation trend since 2014 but also marks the strongest performance in nearly two decades. But the question remains: can this rebound continue into 2026 and 2027?

The answer is far more complex than the surface numbers suggest. On one hand, policy divergence between the European Central Bank (ECB) and the Federal Reserve (Fed) supports the euro; on the other hand, political risks in Europe, uncertainties in the German economy, and the continued strength of the US under Trump policies cast a shadow over the euro’s outlook.

Core Driving Force: Narrowing Interest Rate Differentials Drive Euro Appreciation

The strongest current support for the euro comes from the interest rate differential between the US and Europe. The Federal Reserve has cut interest rates by 50 basis points from September to October, with the current federal funds rate at 3.75%-4.00%, and plans to further reduce it to 3.4% by the end of 2026. In contrast, the ECB has ended its rate-cut cycle, with deposit facility rates remaining steady at 2.00% since June.

What does this differential mean? When US interest rates decline while European rates remain stable, capital gradually flows from US assets to European assets. Historical data shows that whenever the interest rate gap narrows by 100 basis points, it typically triggers a 5%-8% exchange rate adjustment. Based on this logic, EUR/USD could rise from the current 1.16 to 1.22-1.25. Some analysts even predict that if Germany’s stimulus policies boost economic growth, the ECB might lead rate hikes as early as 2027, further strengthening euro appreciation expectations.

US Economy Performs Better Than Expected, but Problems Are Accumulating

The economic policies of Trump’s second term are beginning to show results. In Q2 2025, US GDP growth reached 3.8%, mainly driven by explosive growth in AI investments. The “One Big Beautiful Bill Act” was passed in July, maintaining corporate tax rates at 21%, and with low energy costs in the US, attracting investments from global manufacturing giants—TSMC building a plant in Arizona ($165 billion), Samsung investing $44 billion in Texas, and Intel expanding by $20 billion in Ohio.

However, long-term concerns in the US are also mounting. The federal deficit is expected to reach 6% of GDP by 2026, and Trump’s public criticism of the Federal Reserve’s independence has weakened international investor confidence. As a result, the dollar has depreciated more than 10% against the euro since early 2025—exactly what Trump wanted, but its sustainability is questionable.

Germany’s Stimulus Plan: A Promising but Challenging Promise

Germany’s €50 billion infrastructure fund over twelve years is seen as a key support for euro appreciation. However, closer examination reveals three major challenges.

First, Long-term Energy Cost Burdens. Industrial electricity prices in Germany are 15-20 cents per kWh, three times higher than in the US. Even if the government offers a temporary discount of 5 cents per kWh from 2026-2028, it’s only a short-term relief. For energy-intensive industries like chemicals, steel, and chips, structural cost disadvantages remain, and companies that have already moved out are unlikely to return due to a temporary subsidy.

Second, Practical Implementation Constraints. Germany’s infrastructure projects take an average of 17 years from planning to completion, with approval processes alone taking 13 years. The construction sector currently faces a shortfall of 250,000 workers, highlighting efficiency issues. Stimulus plans take years to show results, but economic conditions can change rapidly, and the industrial landscape may have shifted significantly by then.

Third, Political Uncertainty. In the 2026 state parliament elections, opposition parties could become the largest in several states (polls around 25%). Political chaos could delay or weaken the implementation of stimulus plans, pushing up German bond yields and borrowing costs.

French Debt Crisis and the Overall Dilemma in the Eurozone

France’s political and fiscal situation is even more worrying. In October, the government collapsed within 24 hours, with a deficit of 6% and debt at 113% of GDP. French government bond yields are even higher than Spain’s, serving as a clear warning signal.

From macro data, the Eurozone’s Q3 growth was only 0.2% quarter-on-quarter, with an annualized rate of 1.3%, far below the US Q2 growth of 3.8%. The 2026 growth forecast is only 1.5%, heavily dependent on the effects of German stimulus. Although inflation has fallen to 2%, meeting the ECB’s target, and unemployment is at 6.3%, this puts the ECB in a dilemma: if Germany’s stimulus pushes prices higher, the ECB may need to raise interest rates, which would be disastrous for heavily indebted Southern European countries.

Analyst Predictions: Strong Consensus but Growing Divergence

Market consensus for EUR/USD at the end of 2026 is bullish, with major banks like Morgan Stanley, BNP Paribas, and Goldman Sachs forecasting 1.25; JP Morgan and ING predict 1.22-1.25; only Wells Fargo is relatively conservative, forecasting 1.18-1.20.

By 2027, divergence becomes more pronounced. Deutsche Bank sees 1.30, Morgan Stanley predicts 1.27, but Wells Fargo is bearish at 1.12, reflecting fundamentally different views on the long-term outlook for Europe and the US.

Three Possible Futures

Baseline Scenario: US and European factors offset each other, with EUR/USD oscillating between 1.10-1.20, mostly staying within 1.14-1.17. The interest rate differential supports the euro’s floor, while European risks limit upside potential.

Pessimistic Scenario: Germany’s political situation becomes unstable in 2026, hindering stimulus implementation. Meanwhile, the US unexpectedly strengthens, with AI productivity gains, inflation falling back to 2%, and the Fed pausing at 3.5%. EUR/USD declines to 1.05-1.10.

Optimistic Scenario: Germany’s political stability improves, stimulus effects accelerate, and the eurozone’s growth rises to 2%. The ECB prepares to hike rates in 2027. Meanwhile, US stagflation risks increase, Trump’s interference with the Fed intensifies, and US assets are sold off. EUR/USD breaks above 1.20 and surges to 1.22-1.28.

Practical Advice for Traders

Given the uncertain outlook, flexible and event-driven strategies are most prudent. Key points to watch in 2026 include German state elections, the new Fed chair’s policy stance, France’s fiscal developments, the implementation of German stimulus data, and US employment reports.

Risk management is crucial. While the interest rate differential logic supports long-term euro appreciation, geopolitical shocks (such as energy crises), political upheavals, or resilience in the US economy could disrupt plans. Currently, technical support levels for EUR/USD are at 1.155 and 1.147; breaking below these could trigger rapid moves toward 1.10-1.12. Resistance is at 1.18-1.19; sustained breakthroughs are needed to open the path to 1.22-1.25.

Summary: The EUR/USD in 2026-2027 will evolve amid a tug-of-war of multiple forces. The US-Europe interest rate differential provides a floor for the euro, but German policy execution, France’s debt issues, and US growth resilience are all variables. The final outcome depends on which of these uncertainties materializes first. Investors should prepare for volatility, closely monitor political schedules and economic data, and adjust positions flexibly.