Euro to Dollar Week Ahead Forecast: Interest Rate Battle Intensifies Above 1.16

Modified: Monday, 7 September 2026 09:01 BST - Written by David Woodsmith

STORY LINK Euro to Dollar Week Ahead Forecast: Interest Rate Battle Intensifies Above 1.16

The Euro to Dollar exchange rate (EUR/USD) has settled just above 1.1600 as investors prepare for crucial September decisions from both the Federal Reserve and European Central Bank.

Markets remain divided over the Fed's next move, while another ECB rate hike is widely expected, leaving relative yields, energy prices and increasingly strained fiscal backdrops as the key drivers for the pair.

EUR/USD Forecasts: Central banks under pressure

MUFG is backing Euro to Dollar (EUR/USD) exchange rate gains to 1.20 by the second quarter of 2027 as the dollar comes under pressure and the Euro area is resilient.

Schroders, however, is backing EUR/USD losses to 1.10 by the end of 2026.

EUR/USD settled just above 1.16 with traders now considering that the chances of a September Fed rate hike are close to 50% while there are strong expectations that the ECB will hike rates this month.

Yield differentials will inevitably continue to play an important role. Schroders Senior economist George Brown commented; “We expect the ECB to finish its hiking cycle by the end of the year, while the Federal Reserve will likely be just beginning to raise rates.”

He added; “That should widen rate differentials in favour of the dollar and lead to a weaker euro by year.”

MUFG is less convinced that the Fed will act and notes the risk of dollar selling on fiscal fears amid rising long-term rates and potential Treasury attempts to cap yields.

According to the bank; “Attempts to cap yields without addressing the fundamental factors behind the move does not instil confidence amongst global investors and the prospect of fiscal consolidation ahead of the mid-terms or even through the remainder of Trump’s term in office remains very low.”

Euro-Zone economic and political developments will also be important, especially with a fresh increase in energy prices.

MUFG did note the risk that an AfD win in Saxony-Anhalt would further undermine the Merz government.

It added; “While political developments warrant close monitoring, we continue to believe that EUR direction will be determined primarily by relative growth and interest rate expectations rather than electoral outcomes. Recent signs of economic resilience and the continued willingness of the ECB to respond to upside inflation risks will continue to provide support for EUR/USD.”

Rabobank notes that the Euro has struggled on the crosses; “This indicates that the market has remained reluctant to build long EUR positions against the backdrop of the Iran war in view of the Eurozone’s energy importer status and the headwinds to growth and inflation that this status implies.”

Credit Agricole is backing EUR/USD losses to 1.13 on economic and political grounds and commented; "The pair is trading as collateral damage of geopolitical risks – ranging from US-China tensions to the Ukraine war and the conflict in the Middle East. European political and fiscal risks could grow too, in the wake of the German regional elections this month and ahead of the French presidential elections in Q227.”

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TAGS: Euro Dollar Forecasts