Title: 2026 Euro to Dollar Forecast: Diverging ECB and Fed Policies to Support EUR, Says Nomura
Author: Tim Clayton
Original Source: ExchangeRates.org.uk
A growing divergence between the European Central Bank (ECB) and the Federal Reserve (Fed) could prove a key factor strengthening the euro against the US dollar into 2026, according to analysts at Nomura. While global market conditions and geopolitical risks remain deeply interconnected, central bank strategy is a primary driver behind large currency moves, especially in developed market pairs like the EUR/USD.
According to Tim Clayton in his article on ExchangeRates.org.uk, Nomura analysts expect the EUR/USD exchange rate to reach 1.15 by the end of 2025 and 1.20 by the end of 2026. This would reflect a meaningful appreciation in the euro, especially considering recent pressures on the currency due to economic underperformance in the Eurozone and dollar strength driven by high US yields.
This extended article elaborates on the key drivers behind Nomura’s forecast, including Central Bank divergence, macroeconomic indicators, interest rate trajectories, and global risk factors.
Central Bank Divergence: A Key Catalyst
Nomura’s outlook hinges significantly on monetary policy divergence between the ECB and Fed. The two institutions are expected to follow different paths as the global economy evolves over the next 18 to 24 months.
Key points from Nomura’s analysis include:
– The ECB is expected to complete its policy tightening cycle earlier than the Fed but will maintain a cautious and measured approach to rate cuts.
– The US economy, currently outperforming peers, is expected to cool down gradually, prompting the Fed to initiate rate cuts sooner and more aggressively than previously anticipated.
– By 2026, the interest rate gap between the US and the Eurozone may narrow considerably, reducing support for the US dollar.
Why the Fed May Cut Rates More Aggressively
Nomura anticipates that the Fed will begin cutting interest rates in mid-2024, as US growth slows and inflation continues to normalize. Their rationale includes:
– The US economy has maintained strong growth relative to other developed markets, supported by robust consumer spending and a resilient labor market.
– However, underlying signs of economic moderation are emerging, including weaker manufacturing activity and a slowdown in housing.
– Sticky inflation risks remain but are trending in the right direction, allowing the Fed flexibility to slightly pivot policy.
– Fed rate cuts, if front-loaded and stronger than those in the Eurozone, could undercut the dollar’s yield advantage, favoring EUR/USD upside.
ECB’s More Conservative Approach
While the ECB is expected to begin cutting rates as well, Nomura believes it will adopt a more cautious stance. This is due to the structural differences between the US and Eurozone economies.
Driving this slow approach within the Eurozone:
– Inflationary inertia, especially in services and wage growth, may compel the ECB to move more cautiously with easing.
– Euro area economic growth is recovering at a slower pace compared to the US, creating limited room for aggressive monetary accommodation.
– Political risks, including upcoming elections in key EU member states and persistent concerns around fiscal policy in countries like Italy and France, will keep the ECB on guard.
– Maintaining euro stability remains a top priority, especially in the context of trade balances and capital flows.
Macroeconomic Outlook: Eurozone Steady, US Cooling
Supporting the divergence narrative is the macroeconomic backdrop of each region. While the Eurozone has faced multiple economic challenges since the Russian invasion of Ukraine, its recovery is expected to gradually gain traction through 2025 and into 2026.
Nomura outlines the following key expectations:
Eurozone Economic Factors
– Gradual recovery in German manufacturing, particularly in the auto and machinery sectors.
– Improvement in Euro area consumption, supported by cooling energy prices and fiscal support.
– Easing inflation across core regions such as France, Germany, and the Netherlands.
– Investment in green energy and infrastructure programs will support
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