Euro to Dollar Forecast: Can EUR/USD Break Higher as Fed Risks Grow?

Modified: Monday, 19 January 2026 07:31 BST - Written by Tim Boyer

STORY LINK Euro to Dollar Forecast: Can EUR/USD Break Higher as Fed Risks Grow?

The Euro to Dollar exchange rate (EUR/USD) has eased back from recent highs, slipping toward 1.16 as investors grow more cautious on the timing and scale of Federal Reserve rate cuts.

While some banks still see scope for euro gains over the medium term, resilient US data and a firmer dollar tone have capped upside for now.

Markets are increasingly focused on Fed policy credibility and whether US rates can stay higher for longer into 2026.

EUR/USD Forecasts: Battle for Supremacy

RBC Capital Markets expects that the Euro to Dollar (EUR/USD) exchange rate will make gains in 2026, but has lowered its end-year projection to 1.20 from 1.24 with this level now seen as being reached at the end of 2024.

After little change initially, ING is continuing to back gains to 1.22 by the end of 2026 as US interest rates continue.

EUR/USD drifted lower to test the 1.1600 area during the week.

Markets are expecting two Fed rate cuts during 2026.

Credit Agricole is expecting Euro losses as the Fed resists rate cuts; “We continue to expect unchanged rates in January.

Past that, our current base case has the pause turning into an extended one that lasts through the entirety of 2026, though this is predicated upon seeing some stabilisation in the labour market in upcoming reports, where weaker-than-expected data would raise the risks of a shorter pause and/or more easing than we currently project.”

The issue of Fed independence will remain a key issue.

Early this week, the justice department issued subpoenas against the Federal Reserve and Chair Powell with claims of malpractice over Federal Reserve building renovations.

Powell pushed back strongly against the move and defended the bank strongly. MUFG commented;

“The repeated attacks on the Fed’s independence to satisfy President Trump’s desire for lower rates continues to pose downside risks for the US dollar and supports our forecast for a weaker US dollar.

It added; “However, it could backfire on President Trump if Fed officials dig in and keep rates on hold as an act of defiance to highlight the Fed’s ongoing independence in setting policy.”

RBC still expects net dollar losses against the Euro on three grounds as the cost of carry compresses between the countries, hedges on US assets will rise. It also expects a rotation into European assets and stronger Euro-Zone growth.

RBC is still cautious over the scope for substantial gains;

“We are aware of the headwinds to long-term EUR/USD strength – US productivity growth outperforms Europe’s, there is no good European alternative to USTs, the US dominates Europe in AI and tech and the EU also still has an undercurrent of political risk.”

ING also sees near-term potential barriers to Euro support;

“With volatility low, and high-yield and emerging market currencies in demand, it seems investors are preferring to fund carry trades out of the euro at a cost of just 2.00% rather than dollars at around 3.55%.”

Deutsche Bank expects Asian currency developments will be a key element;

“Comparing medium-term FX valuation estimates to mid-dated forwards shows that EUR/USD is now very close to fair value, even if the dollar is still expensive. It will be very hard for EUR/USD to break 1.20 in the absence of greater idiosyncratic strength in Asia FX.

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TAGS: Euro Dollar Forecasts