EUR/USD Exchange Rate 2026-2027: The Dollar-Euro Divergence in Focus – Is the Interest Rate Differential Sufficient for Further Appreciation?

After an impressive rally in 2025 – the Euro shot from 1.04 to 1.16 USD – many traders are asking the central question: Will this upward trend continue or will the tide turn? The answer depends on factors that are significantly more complex than just the classic interest rate story.

The Numbers: EUR/USD in the Spotlight

The EUR/USD pair is currently in a consolidation phase after one of the most volatile periods in recent history. The rate is oscillating around the 1.16 USD mark. What is remarkable: in January 2025, the pair was still at 1.02 USD – a rally of over 13 percent in just a few months. The yearly high was reached on September 16 at 1.1868, with trading volatility exceeding 1,600 pips.

From a technical perspective, a critical zone is forming. Supports are at 1.1550 and 1.1470. A break below would challenge the bullish narrative and could push the Dollar-Euro rate toward 1.10-1.12. On the upside, the zone 1.1800-1.1920 acts as resistance – if the rate sustainably breaks the 1.20 level, there is potential up to 1.22-1.25.

Interest Rate Divergence: The Strongest Argument for the Euro

The asymmetric monetary policy stance between the Fed and the ECB forms the fundamental basis for further Euro strength. While the US Federal Reserve lowered its key rates by a total of 50 basis points in September and October 2025, now at 3.75-4.00%, the ECB has effectively ended its cycle. The deposit rate has remained unchanged at 2.00% since June 2025.

The mechanical effect is simple: as the interest rate gap between the dollar and euro narrows, the differential yield expands. Capital flows reorient – more money flows into higher-yielding euro assets. Historical analyses suggest that a narrowing of the interest rate gap by 100 basis points typically leads to a currency adjustment of 5-8%. Extrapolated, this would push EUR/USD to 1.22-1.25.

An additional scenario: if the ECB raises rates in 2027 – should Germany’s stimulus package have a stronger-than-expected effect – this effect would be multiplied. Then, we are talking about a real divergence as opposed to a mere convergence of key rates.

USA under Trump: Strength or Illusory Growth Bubble?

The second Trump administration provides a mixed record. US GDP growth rose to 3.8% in Q2 2025 – mainly driven by massive investments in the AI sector. But the downsides are often overlooked:

Trade agenda as a poker game: The “Liberation Day” on April 2 announced tariffs up to 145% and triggered a stock market crash. After 90 days, a compromise was – unsurprisingly – reached. Trump’s negotiation pattern is established: maximum demands → compromise → selling as success. The reality: tariffs are now averaging 15-18%, still above historical levels, stabilizing the dollar forecast.

Tax reform drives capital flows: The “One Big Beautiful Bill Act” from July 4 made the 2017 tax cuts permanent. With corporate taxes at 21%, low energy costs, and technological dominance, the US becomes a magnet for direct investments. TSMC, Samsung, and Intel announced relocations of production.

The structural problem: US national debt is growing faster than the economy. The budget deficit will reach about 6% of GDP in 2026. Trump’s verbal attacks on the Fed also undermine international investor confidence. The Dollar forecast is thus clouded, even though the economy remains temporarily stable.

Europe: Stimulus as a Hope or a Pipe Dream?

The German 500-billion-euro infrastructure stimulus is hailed in many analyses as the game-changer for the EUR/USD forecast. But reality could be more sobering:

Energy costs as a structural obstacle: German industrial electricity prices are at 15-20 cents/kWh – two to three times higher than in the US. The temporary industrial electricity price of 5 cents/kWh (2026-2028) cannot offset this disadvantage. For energy-intensive sectors (Chemicals, Semiconductors), German locations remain unattractive in the long term – the stimulus only fights symptoms, not causes.

Bureaucratic delays: German infrastructure projects take an average of 17 years from planning to completion. The construction industry reports 250,000 open positions. The consequence: delayed implementation, reduced multipliers, weaker rate impacts on EUR/USD.

Political instability: The state elections in 2026 could make the AfD the strongest force in several federal states (Polls: ~25% nationwide). Political paralysis of the grand coalition could massively slow down stimulus implementation and increase risk premiums on German government bonds – costly for the euro.

France as a debt bomb: The collapsed government in October 2025, with a deficit at 6% of GDP, debt ratio at 113% – and French government bonds already yielding higher than Spanish ones. This is a warning signal. The entire Eurozone grew only 0.2% QoQ in Q3 2025 (annualized 1.3%), while the US grew at 3.8%.

Bank Forecasts: Upward Bias Meets Skeptics

The consensus among major investment houses is clearly bullish for the euro:

End of 2026:

• Morgan Stanley, BNP Paribas, Goldman Sachs: 1.25
• JP Morgan, ING: 1.22-1.25
• Wells Fargo: 1.18-1.20 (the skeptic)

End of 2027:

• Deutsche Bank: 1.30 (the optimist)
• Morgan Stanley: 1.27
• Wells Fargo: 1.12 (bearish outlier)

The range is wide – from 1.12 to 1.30 – highlighting the uncertainty.

Three Scenarios for EUR/USD 2026-2027

Base Case (Probability: 50%): The 1.10-1.20 range dominates. The interest rate differential creates a floor at 1.10-1.12, European risks limit upside potential at 1.18-1.20. The stimulus only partially works, US growth is moderate (1.8-2.2%). The rate mostly moves between 1.14-1.17.

Bear Case (Probability: 25%): A win for the AfD in 2026, dysfunctional grand coalition, stimulus delays, escalation of the French crisis. ECB cuts rates again. US surprises positively with an AI boom and inflation falls to 2%. EUR/USD drops to 1.05-1.10, possibly testing 1.05.

Bull Case (Probability: 25%): Germany stabilizes, stimulus proceeds swiftly, France eases, Eurozone growth reaches 2%. ECB signals rate hikes in 2026 for 2027. Meanwhile: US inflation remains sticky, labor market weakens, stagflation looms. Foreign investors reduce US holdings. EUR/USD breaks through 1.20 and moves into the 1.22-1.28 zone.

Critical Factors for 2026-2027

Focus on:

• German state elections
• Successor to Jerome Powell (May 2026)
• French fiscal developments
• Stimulus data releases from Germany
• US labor market and inflation figures

Unrecognized risks:

• Germany risk: Political paralysis is not a hypothetical scenario but very likely
• Geopolitical shocks: Ukraine escalation or energy crisis 2.0 would favor the dollar
• US resilience: The AI boom could bring long-term annual productivity gains of 2-3%

Conclusion: EUR/USD Forecast in a Tension Field

The EUR/USD pair 2026-2027 stands between concrete upward arguments and significant downward risks. The interest rate divergence creates a floor at 1.10-1.12, an overvaluation of the dollar (23%), and potential capital flow reversals support these anchors. At the same time, German fragmentation, European energy cost disadvantages, and US economic strength threaten the bullish narrative.

Key questions will be: Will Germany establish a stable government after the 2026 elections and implement the stimulus despite structural hurdles? Will the US economy remain resilient or show stagflationary tendencies? And how aggressively will Trump’s successor at the Fed act?

For active traders: EUR/USD trading now requires flexibility and event-driven positioning rather than buy-and-hold. The conditions in both regions are highly dynamic – those who remain rigid risk significant drawdowns.