In 2026, the EUR/USD pair is likely to maintain its uptrend. However, the rally will be driven not by a strong euro but rather by a weak US dollar. The Fed is set to cut rates, while the ECB and other central banks may raise them. Let's discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- The federal funds rate may fall by 90 basis points.
- Japan and other countries may tighten policy.
- The ECB is signaling the end of the cycle.
- Long trades can be increased if the EUR/USD pair breaks through 1.16.
Weekly US Dollar Fundamental Forecast
As a rule, central banks tend to steer their policies in a shared course, with the Fed leading the way. However, in 2026, their paths may diverge, as the Fed is expected to ease monetary policy aggressively. Its counterparts, on the other hand, are expected to maintain or even raise interest rates. As a result, the US dollar is in a highly vulnerable position. Will EUR/USD bears find the strength to resist?
BoJ, Fed, and ECB Interest Rates
Source: Bloomberg.
Hawkish reversals are becoming popular on Forex. South Korea and New Zealand were the last to signal the end of their monetary expansion cycles. Canada was one of the first to send such signals. Accelerating inflation in Australia has prompted UBS and Barrenjoey Markets Pty to speculate about a cash rate hike by the Reserve Bank.
The minutes of the ECB's October meeting showed that the Governing Council was reluctant to change rates. According to officials, the current level allows them to gather more information to assess risk factors. It can be considered reliable enough to manage shocks. Either a sharp rise or a sharp fall in inflation could trigger a change in borrowing costs. At the moment, neither is expected.
As a result, the groundwork has been laid for a classic divergence in monetary policy. The futures market expects the federal funds rate to fall by approximately 90 basis points in 2026. Over the same period, Japan may lift its overnight rate by 75 basis points, and the Reserve Bank of New Zealand may increase its cash rate by 40 basis points.
The Bank of England stands apart. The derivatives market forecasts a 90% probability of a reduction in the repo rate from 4% to 3.75% in December and estimates the scale of monetary expansion in 2026 at 64 bps. This figure decreased after Rachel Reeves presented the draft budget. The Chancellor claims that it is aimed at curbing the highest inflation in the G7, but in fact, it may accelerate it.
Chances of Candidates for Fed Chairmanship
Source: Wall Street Journal.
Indeed, US interest rates are higher than those in other countries, which increases the attractiveness of American assets and, on paper, attracts capital inflows into the United States. However, this requires prolonged pauses in the central banks' cycles. With Kevin Hassett at the helm of the Fed, this is unlikely to happen.
Thus, the EUR/USD pair's return to an upward trend in 2026 will not be due to a strong euro, but rather a weak US dollar. A reduction in the federal funds rate will definitely put downward pressure on the USD index. Only robust US economic statistics may reverse this trend.
Weekly EURUSD Trading Plan
In such conditions, one should look for opportunities to increase previously formed long positions on the EUR/USD pair. One such opportunity could be a breakout of the resistance level of 1.16.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of EURUSD in real time mode
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