**MUFG Forecasts Euro to Dollar Exchange Rate (EUR/USD) at 1.26 Within the Next 12 Months**
*Based on the original article by James Elliot, published on ExchangeRates.org.uk on October 3, 2025. This article expands on the original report with additional context and analysis regarding the EUR/USD rate forecast from MUFG.*
The foreign exchange market has seen substantial volatility in recent months, underpinned by shifting macroeconomic fundamentals, persistent geopolitical tensions, and diverging monetary policy paths between key central banks. Amid this uncertain landscape, financial institutions have been actively updating their projections. One notable forecast comes from the Mitsubishi UFJ Financial Group (MUFG), one of Japan’s major banking providers and a recognized authority in the global macroeconomic research space.
MUFG has released a 12-month forecast indicating that the euro (EUR) will strengthen significantly against the US dollar (USD), rising to a EUR/USD exchange rate of 1.26. This view posits a marked appreciation from current levels and is driven by a number of key economic and policy-based considerations. Below, we examine the rationale behind this forecast, the assumptions involved, and the broader implications for currency markets.
## Structural Drivers Behind MUFG’s Bullish Euro View
MUFG’s analysts outline several core factors that contribute to their projection of significant euro appreciation over the coming year:
### 1. Shift in Federal Reserve’s Policy Stance
According to MUFG, the Federal Reserve appears to be at or near the conclusion of its tightening cycle. The narrative of sustained interest rate hikes, which previously propelled the US dollar to multi-decade highs, is losing momentum.
– The Fed’s aggressive hiking stance in 2022 and 2023 laid the groundwork for a strong dollar.
– However, softening inflation data and signs of weakening labor market conditions are prompting speculation of upcoming rate cuts.
– MUFG argues that declining interest rate differentials between the US and the Eurozone will act as a headwind for the dollar in the months ahead.
### 2. ECB’s Recalibrated Approach
The European Central Bank (ECB), while also slowing down its tightening policy, is expected to maintain a more hawkish tone than markets currently anticipate:
– The ECB is projected by MUFG to resist aggressive rate cuts, especially if inflation remains stubbornly above the 2% target.
– Energy markets remain volatile, with supply shocks emanating from ongoing geopolitical tensions. These could keep Eurozone inflation higher for longer.
– As a result, short-term interest rate spreads between USD and EUR could narrow, supporting euro appreciation.
### 3. Reversion from Overvalued Dollar Levels
Another component of the forecast is the belief that the dollar’s valuation remains historically stretched:
– The US dollar surged in the aftermath of the pandemic and again following the Russia-Ukraine conflict, benefiting from its safe-haven status.
– According to MUFG, the dollar remains overvalued on a trade-weighted basis, and this makes it vulnerable to corrections amidst improving global risk sentiment.
– Sentiment-driven sell-offs may gather pace if markets sense the Fed has shifted toward an easing bias.
## Short-term Themes: Risk Sentiment, Economic Divergence
In the near term, MUFG highlights several additional factors that could impact the EUR/USD exchange rate and support its bullish stance:
### Global Risk Sentiment Improving
Investors have shown increasing appetite for risk assets, particularly as inflationary pressures ease and growth data improves across regions. This has important implications:
– A shift toward risk-on market sentiment typically reduces demand for safe-haven currencies like USD.
– The euro, often categorized as a pro-cyclical currency, tends to benefit in periods of global economic expansion and financial calm.
### Economic Convergence Between US and Eurozone
The divergence in economic performance, once favoring the United States, is narrowing:
– The Eurozone economy has shown resilient recovery signs driven by consumption and stronger-than-expected industrial
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