Euro 2026 Outlook: EUR/USD Positioned for Continuation as Policy Paths Diverge

The outlook for the euro remains constructive heading into 2026. EUR/USD has delivered a strong recovery, gaining more than 13% this year and trading near four-year highs. After rallying over 17% from the yearly lows, the pair stalled at a major technical resistance zone in Q3 and has since moved into consolidation. While near-term pullbacks remain possible, the broader trend structure continues to favor upside into 2026.

The key driver remains growing monetary policy divergence between the Federal Reserve and the European Central Bank, with markets increasingly focused on the next phase of the rate cycle.

Federal Reserve: Focus Shifts to the Labour Market

The Federal Reserve cut rates for a third time in December, ending 2025 with the policy rate at 3.50% to 3.75%. Updated projections highlight growing divisions within the FOMC, with policymakers split on the pace and extent of further easing. Chair Jerome Powell indicated that rates are now close to neutral and that the next move is likely lower, assuming inflation continues to cool.

Labour market data is set to play a decisive role in shaping policy expectations. Powell acknowledged that recent job figures may be overstated, suggesting the Fed could place greater emphasis on underlying employment trends in 2026. As long as job growth continues to soften, markets see scope for additional rate cuts next year, with two cuts largely priced and a third remaining a possibility.

The main risk to this outlook would be a renewed acceleration in employment or inflation. Absent those surprises, the bias remains toward further easing, limiting upside for the US dollar.

ECB Outlook: Steady Policy and Improving Growth

The ECB held rates unchanged in December, with updated projections pointing to modest improvements in euro area growth. Policymakers continue to view domestic demand as the primary driver of activity, supported by increased government spending on infrastructure and defence.

While inflation forecasts were revised slightly higher, projections still show price pressures stabilising near the ECB’s 2% target over the medium term. This has reinforced the Governing Council’s comfort with its current policy stance, with rates expected to remain on hold through much of 2026.

EUR/USD Outlook: Consolidation Within a Broader Uptrend

With the ECB holding steady and the Fed expected to ease further, interest rate differentials are gradually shifting in favour of the euro. This backdrop supports the broader bullish structure in EUR/USD, even as the pair pauses below key resistance.

Near-term consolidation or corrective pullbacks would not be inconsistent with the broader trend. A sustained break above the current resistance zone would likely mark the resumption of the multi-year advance, setting the stage for the next leg higher into 2026.

Bottom line:Policy divergence remains the core driver. As long as the Fed continues to ease and the ECB maintains a steady stance, EUR/USD remains biased higher, with any pullbacks likely to be corrective rather than trend-reversing.