US Dollar: Gradual depreciation path versus Euro – BNP Paribas

Source Fxstreet

BNP Paribas expects the US economy to grow above potential in 2026, with GDP at 2.4% and inflation overshooting at 3.8%. The bank sees the Fed Funds target range steady at 3.5%-3.75% as the FOMC adopts a two-sided outlook. In FX, BNP Paribas projects a gradual US Dollar depreciation against the Euro, with EUR/USD reaching 1.21 by Q4 2026 and 1.25 by Q4 2027.

Fed steady as Dollar weakens gradually

"The US economy is expected to grow above its potential in 2026, with an average annual growth rate of 2.4%, a yearly improvement (up from 2.1% in 2025). This apparent resilience to energy, uncertainty and tariff and energy shocks, together with above-trend productivity growth, masks K-shaped growth, driven by investment linked to AI-optimism and consumption by the wealthiest amid a wealth effect (historically high stock market valuations)."

"Inflation overshooting is set to continue (3.8% in 2026) at least through 2028, largely because of the rise in oil prices and tariffs – although the impact of these appears to be less significant than expected."

"We expect the Fed Funds target range to remain steady at 3.5% - 3.75%, with a FOMC shifting to a ‘two-sided outlook’, signaling equal readiness to implement rate hikes or cuts if warranted."

"In our base-case scenario (gradual normalisation of the Middle East situation with persistent price tensions), we expect the USD depreciation against the EUR to resume, albeit very gradually, amid broader diversification away from the dollar."

"We forecast EUR/USD to reach 1.21 by Q4 2026 and 1.25 by Q4 2027."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)

Disclaimer: For information purposes only. Past performance is not indicative of future results.
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