ECB Policy Outlook for 2026: What It Could Mean for the Euro’s Next Move

If the Fed keeps easing in 2026 while the ECB stays parked, the euro’s direction will largely come down to how fast the rate gap closes—and whether growth fears in Europe re-ignite.
Eurozone data look sluggish but not collapsing, while inflation has started to creep back above the ECB’s 2% target—both reasons the ECB can afford to wait.
For EUR/USD, the market is basically weighing two tracks: a return toward 1.20 if Europe holds up and the Fed cuts more, or a slide back toward 1.13 (and potentially 1.10) if growth disappoints and the ECB blinks.

TradingKey — The US Federal Reserve has already entered a rate-cut cycle, delivering its third cut since September. The European Central Bank, by contrast, has stayed in “wait and see” mode, keeping its key rate at 2.15% since July. If the Fed remains dovish through 2026 while the ECB stands pat, what does that do to the euro—and where does EUR/USD realistically go next?

Eurozone growth is weak, but not falling apart

The Eurozone’s growth engine is running slow, and some of that is structural rather than cyclical. Germany’s auto sector—hit by the EV transition and supply-chain disruptions—has seen output fall 5%. Meanwhile, underinvestment in innovation has left parts of Europe trailing the US and China in key tech segments.

On top of that, trade friction is back in the frame. The Trump administration’s “reciprocal tariff” approach has raised the risk of escalation. The US is reportedly considering 10% to 20% tariffs on EU goods, a direct hit to export-heavy economies. EU exports to the US are described as falling 3%, with autos and chemicals taking the biggest damage.

The European Commission’s autumn outlook reflects that mixed picture: it sees output growing 1.3% in 2025, 1.2% in 2026, and 1.4% in 2027. The tweak matters: 2025 was revised up versus May expectations, while 2026 was nudged down, which reads like a quiet admission that next year’s growth path may be bumpier than people want to price in.

Even within the bloc, the tempo isn’t uniform. In Q3, the Eurozone expanded 0.2%, but Spain and France posted stronger prints (0.6% and 0.5%), while Germany and Italy were flat. The headline is slow growth—yet the subtext is resilience: it’s not a boom, but it’s also not a collapse. That baseline stability is part of what keeps the euro from looking fundamentally “broken.”

Rising inflation keeps the ECB’s rate stance firm

Inflation is no longer sliding cleanly toward target. Eurostat’s preliminary figures show Eurozone inflation at 2.2% year-on-year in November, up from 2.1% in October, staying above the ECB’s 2.0% medium-term target.

The composition matters too: energy prices fell 0.5%, while services inflation rose 3.5%, up from 3.4% in October. Services is the sticky bit—exactly the category central banks hate to see re-accelerate.

Against that backdrop, on December 18, the ECB held all three key rates unchanged: the deposit facility rate at 2.00%, the main refinancing rate at 2.15%, and the marginal lending facility at 2.40%.

With cuts paused in the second half of 2025 and updated projections implying inflation can drift toward target over the next three years, the base case for 2026 is an ECB that largely stays put: not rushing to hike, and not seeing a compelling need to cut either.

President Christine Lagarde reinforced that tone after the December meeting, describing policy as being in a “good place,” essentially signaling no urgency.

Outside the ECB, the market narrative is similar. Christian Kopf (Union Investment) expects no near-term move; if anything changes in 2026, he suggests it’s more likely late 2026 or early 2027—and in the direction of a hike. A Reuters poll also found most economists expect the ECB to keep rates unchanged through 2026 and 2027, although the 2027 range is wide (1.5%–2.5%), which tells you confidence drops sharply the further out you go. BNP Paribas chief economist Isabelle Mateos y Lago also points out that the bar for action—either direction—looks high in the next few meetings.

The Fed cut three times in 2025; 2026 could keep the easing bias

The Fed ended up cutting three times in 2025—more than its December 2024 projection of two cuts. In March it held at 4.5%, partly due to concerns tariffs could reheat inflation and slow disinflation progress. But in the second half, cooling inflation and softer labor conditions opened the door. The Fed cut 25 bps in September, then followed with cuts in October and December, taking the federal funds target range down to 3.5%–3.75%.

Politics is an extra variable here. Jerome Powell’s term ends in May 2026, and he’s widely expected not to be reappointed. Trump has repeatedly criticized Powell for moving too slowly on cuts and has hinted that the next Fed chair would push easing faster. Trump has said he will choose the next Fed chair in early January. The text notes Bessent has organized and overseen the candidate screening process, with an agenda that could drive broader changes at the Fed while also supporting rate cuts.

Economists like Moody’s chief economist Mark Zandi expect multiple cuts in 2026—but not because the economy is roaring; rather, because it’s stuck in a “delicate balance.”

Big banks broadly line up on a similar call: Goldman Sachs, Morgan Stanley, Bank of America, Wells Fargo, Nomura, and Barclays are cited as expecting two cuts in 2026, taking policy to 3.00%–3.25%. Nomura places those cuts in June and September, while Goldman expects March and June.

So where does EUR/USD go in 2026?

EUR/USD in 2026 is basically a story of Europe’s growth durability + the ECB’s patience versus America’s growth momentum + the Fed’s cut path. The rate differential matters, but so does the reason why the differential changes—because markets trade the narrative as much as the numbers.

Two broad scenarios frame the debate:

• Stronger Eurozone growth (above 1.3%) + inflation edging up slowly:
  The ECB likely holds rates steady, supporting the euro. In that case, EUR/USD could probe above 1.20.

• Weaker Eurozone growth (below 1.3%):
  If growth underwhelms and the ECB leans toward cuts to support activity, that would likely interrupt the euro’s 2025 rebound and pull EUR/USD back toward the 1.13 support zone.

Forecasts from major institutions point in different directions—because the assumptions differ.

• Citi expects the dollar to strengthen against the euro, projecting 1 euro = $1.10 in 2026, on the view that US growth re-accelerates and the Fed cuts less than markets expect. Citi sees EUR/USD potentially bottoming around 1.10 in Q3 2026, roughly a 6% drop from the current 1.1650 level.

• UBS Global Wealth Management (EMEA CIO Themis Themistocleous) takes the opposite angle: if the ECB stays on hold while the Fed continues cutting, the yield gap narrows and that can support the euro. UBS expects EUR/USD to rise to 1.20 by mid-2026.

In plain terms: if 2026 is “Fed cuts + Europe muddles through,” EUR/USD has room to lean higher. If 2026 is “Europe slows + trade shock bites + ECB turns supportive,” then the euro’s upside gets capped fast—and 1.13 (or even 1.10) stops being theoretical.