The euro’s improvement will be put to the test in 2026

Summary

The euro closed 2025 with a significant appreciation against the dollar, supported, among other factors, by a fiscal and strategic shift in Europe. In 2026, its strength will depend less on interest rate differentials and more on institutional credibility, growth, and the geopolitical environment.

Key points

• Key points:
• The euro started 2025 weakened by interest rate differentials and the strength of the dollar, but recovered following Germany’s fiscal pivot and a stronger European strategic stance, which improved growth expectations and attracted capital inflows.
• The dollar’s weakness was reinforced by uncertainty stemming from U.S. trade policy and a partial loss of its role as a safe-haven asset, while the euro consolidated within a stable range during the second half of the year.
• The baseline scenario for 2026 points to further euro appreciation toward the 1.20 area, supported by gradual monetary normalization, with the Fed still cutting rates and the ECB having brought its easing cycle to an end.
• However, the euro’s trajectory will be shaped by non-monetary factors: the succession at the Fed presidency, productivity developments in the U.S. linked to AI, and, in Europe, the ability to translate the fiscal and political momentum of 2025 into effective growth and institutional cohesion, as well as the outcome of the war in Ukraine.

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