Title: EUR/USD Outlook: Euro to Gain Strength Against US Dollar in Early 2026
Original Source: Currency News, Author: Tim Clayton
Original Article URL: https://www.currencynews.co.uk/forecast/20251110-44510_euro-to-dollar-forecast-eur-usd-set-for-gains-in-early-2026.html
The Euro to US Dollar (EUR/USD) currency pair is positioned to make gains as 2026 approaches, following a series of economic developments across both the eurozone and the United States. Currency analysts from major institutions have been revising their forecasts, citing key drivers ranging from inflation expectations and central bank policies to geopolitical stability and energy prices. This analysis explores the primary factors likely to influence the EUR/USD exchange rate in early 2026 and outlines a detailed forecast based on current macroeconomic trends and projections.
Macroeconomic Trends Driving EUR/USD in 2025–2026
Several macroeconomic trends are influencing investor sentiment and market forecasts for the EUR/USD outlook:
1. ECB’s Monetary Policy Path:
– The European Central Bank (ECB) is expected to shift toward a more neutral stance through late 2025 and early 2026.
– Headline inflation in the eurozone has moderated and market expectations now favor potential rate reductions in 2026.
– As inflation subsides and economic growth remains stable, the ECB may not need to maintain policy tightening.
– Core inflation, although still elevated, shows signs of softening, offering the ECB room to pivot.
2. Federal Reserve Policy Dynamics:
– The US Federal Reserve is anticipated to hold off from additional rate hikes through the end of 2025 and into 2026.
– US price pressures have eased due to improving supply chains and weakening labor market momentum.
– A shift in focus from inflation control to supporting economic growth could weaken the dollar over time.
– Market expectations are pricing in a gradual reduction in interest rates starting in the second half of 2026.
3. Energy Market Impact:
– The eurozone, particularly Germany, has benefited from a decline in energy prices compared to peak levels in 2022.
– Reduced energy import costs are improving the eurozone’s balance of payments, easing strain on the euro.
– US energy exports have normalized, and unless supply shocks occur, energy markets may exert downward pressure on the dollar relative to the euro.
4. Labor Market Divergence:
– The US labor market is gradually cooling, which could reduce upward wage pressures and demand-driven inflation.
– In contrast, eurozone unemployment remains stable, and wage growth has been comparatively subdued.
– The divergence between US and eurozone labor dynamics may favor less aggressive central bank action in Europe, increasing the relative attractiveness of euro-denominated assets.
5. Fiscal Discipline and EU Recovery Funding:
– The EU’s commitment to the Recovery and Resilience Facility supports capital investment across the bloc.
– Structural reforms and sustained fiscal support are key to long-term competitiveness in the eurozone.
– Improved fiscal consolidation plans, especially in larger economies such as France and Italy, are boosting confidence in eurozone fundamentals.
Technical and Investor Sentiment Indicators
Beyond economic data, various technical factors and market sentiment analyses provide additional layers to the EUR/USD trajectory:
1. Investor Positioning and Risk Appetite:
– Analysts note a gradual shift toward increased demand for euro-denominated assets among international investors.
– A weakening US dollar encourages investors to diversify holdings away from the greenback.
– Eurozone equity markets have shown resilience, attracting overseas capital and altering FX demand dynamics.
2. Relative Yield Differentials:
– Treasury yields in the US have fallen slightly from their peak, reducing the yield premium versus European bonds.
– European sovereign yields, while lower overall, are bolstered by investor demand amid rising credit stability.
– The narrowing gap in real interest rates creates a tailwind for the euro.
3. Technical
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