EUR/USD 2026-2027: How will the dollar develop after the historic euro rally?

The euro has experienced a remarkable appreciation in 2025. From January to November, EUR/USD climbed from 1.04 to 1.16 – an increase of 13.5% in less than a year. But is this euro rally sustainable, or is a correction looming? The answer is nuanced: while the interest rate divergence between the ECB and the Fed structurally supports further euro strength, political turbulence in Europe and the surprising resilience of the US economy raise significant questions.

The key scenarios for EUR/USD at a glance

Scenario 1 – Base Case (likely): EUR/USD fluctuates between 1.10 and 1.20. Bullish factors (Euro interest advantage) meet bearish factors (European risks). The pair stabilizes around 1.14–1.17.

Scenario 2 – Bearish: EUR/USD falls to 1.05–1.10. Germany faces a political crisis, the implementation of the 500-billion stimulus stalls, and the ECB must cut interest rates. At the same time, the US surprises positively with an AI boom and robust growth.

Scenario 3 – Bullish: EUR/USD rises to 1.22–1.28. Germany’s investment package takes effect, the Eurozone grows, and the ECB can signal rate hikes in 2027. Meanwhile, stagflation worsens in the US.

Why the euro became so strong in 2025 – and what matters now

The euro’s appreciation is based on three pillars: The dollar was overvalued at the start of the year, the Fed is aggressively cutting interest rates (from 5.5% to 3.75%), while the ECB already paused at a 2.0% deposit rate. This interest rate divergence is the most powerful argument for further euro strength – historically, a narrowing of 100 basis points leads to a currency adjustment of 5–8%, which could push EUR/USD to 1.22–1.25.

Adding to this is Germany’s planned infrastructure package: 500 billion euros over 12 years to boost the European economy. But here lies a problem: Germany’s energy prices are 2–3 times higher than in the US, which permanently discourages energy-intensive industries. Also, planning bureaucracy – averaging 17 years from planning to completion – could reduce efficiency. And then there’s the political imbalance: The AfD could become the strongest party in some states in 2026, potentially destabilizing the grand coalition.

The dollar dilemma: US economy stronger than expected

Trump’s second term has given the US economy momentum so far. GDP growth reached a robust 3.8% in Q2 2025, driven by massive AI investments. The “One Big Beautiful Bill Act” made 2017 tax cuts permanent (corporate taxes stay at 21%), attracting major international investments: TSMC is building three chip factories in Arizona ($165 billion), Samsung invests $44 billion in Texas, Intel expands in Ohio ($20 billion).

Long-term dollar weakness problem: The US deficit will reach about 6% of GDP in 2026. Trump’s attacks on Fed independence undermine international confidence. The dollar has fallen over 10% against the euro since the start of the year – a signal that a weak dollar may no longer be the goal (as communicated).

How will the dollar develop mid-term? Analysts are divided. Morgan Stanley, BNP Paribas, and Goldman Sachs expect EUR/USD at 1.25 by the end of 2026, while Wells Fargo is more conservative at 1.18–1.20. For 2027, ranges extend from Deutsche Bank’s bullish 1.30 to Wells Fargo’s 1.12.

French chaos and ECB dilemma

France is the second major risk for the Eurozone. In October 2025, a government collapsed within 24 hours. The deficit is around 6% of GDP, and the debt ratio is 113%. French government bonds even yield higher than Spanish – a classic warning sign.

The Eurozone grew by only 0.2% (annual rate 1.3%) in Q3 2025 – a fraction behind the US. For 2026, only 1.5% growth is expected. The good news: inflation is at 2.0% (ECB target) and unemployment at 6.3%. But the ECB is caught in a trap: if Germany’s stimulus fully takes effect, it would boost inflation – then the ECB would have to raise rates, ruining highly indebted countries.

Technical market situation: Where are the limits?

From a chart perspective, EUR/USD is currently stabilizing around 1.16. Key support levels are at 1.1550 and 1.1470. A fall below 1.15 would challenge the bullish narrative and could open the way for 1.10–1.12.

On the upside, the zone 1.1800–1.1920 acts as resistance. A sustained breakthrough above 1.20 would technically open the door to 1.22–1.25. The 2025 trading range exceeded 1,600 pips – a sign of extreme volatility.

Trading in uncertainty: What traders should watch

Since EUR/USD development in the coming years depends on several unknowns, a news-driven approach is worthwhile:

• German state elections 2026: A success for the AfD could add risk premium to German bonds and weaken the euro
• Powell successor May 2026: New Fed leadership could change the pace of rate cuts
• France’s fiscal crisis: Escalation would increase fragmentation pressure on the Eurozone
• Germany stimulus effects: Will economic acceleration appear from Q2 2026?
• US labor market data: Any cooling could force the Fed to cut rates more

The biggest risk: the downside potential for the euro is often underestimated. A combination of German political chaos + French debt crisis + resilient US economy could push EUR/USD well below 1.10. At the same time, one should not ignore that the dollar rally in 2025 may have come too quickly and a correction is pending.

Conclusion: EUR/USD remains fragmented

The euro in 2026–2027 faces cross-currents. The interest rate differential sets a lower bound at 1.10–1.12, while European risks and US strength cap upside potential at 1.18–1.20. The most likely outcome: EUR/USD trades sideways within these bounds. Whether the dollar will develop further depends on whether Germany solves its structural problems and whether US productivity gains from the AI boom materialize. Until then, the key is to stay flexible and manage risks.