The US Dollar’s sharp decline in the first half of 2025 may lead to diversity in portfolios. However, geopolitical factors and Federal Reserve risks could keep the USD unstable.
Analysts expect significant fluctuations in the EUR/USD pair in 2026, adjusting the 12-month target to 1.18, with a slightly positive outlook. Although shifts in trade tensions, geopolitics, Fed independence, and US growth and inflation risks will likely influence the USD’s value.
Expectations for Eur/Usd
Developments in these areas may cause changes in market sentiment. The EUR/USD is expected to experience wide and volatile trading ranges, with a modest upward trend.
The 12-month forecast for EUR/USD has been revised from 1.20 to 1.18, considering the possibility of a dovish Federal Open Market Committee and speculation about a potential European Central Bank rate hike by the end of next year. The 1-to-3-month forecast remains at 1.16.
Given the sharp drop of the US Dollar earlier this year in the first half of 2025, we see a landscape primed for wide and choppy trading ranges in EUR/USD. This suggests that the market may be shifting toward more diversified portfolios heading into 2026. Traders should be prepared for significant volatility driven by geopolitics and shifting central bank expectations.
We are seeing this play out in the data, with recent US inflation for November 2025 coming in slightly softer than expected at 2.8%. This reinforces the view that the Federal Reserve may adopt a more dovish stance, creating headwinds for the dollar. This aligns with our 1-to-3 month EUR/USD forecast of 1.16, which could serve as a floor.
The Ongoing Inflation Divergence
In contrast, inflation in the Eurozone remains stubborn, with the latest figures hovering around 3.5%, well above the ECB’s target. This is fueling speculation that the European Central Bank could be positioning for its first rate hike late next year. This divergence between a dovish Fed and a potentially hawkish ECB underpins our modest upside bias for the currency pair.
For derivative traders, this environment suggests that buying volatility could be a prudent strategy. Given the expectation of wide swings but no clear breakout, purchasing options to define risk seems wise. Bullish call spreads could be used to target a move toward our 12-month forecast of 1.18, capturing potential upside while capping risk.
The currency volatility indexes confirm this outlook, as the Cboe EuroCurrency Volatility Index (EVZ) has been elevated for months, sitting significantly higher than the calmer levels we saw throughout most of 2024. This makes strategies like straddles or strangles, which profit from large price moves in either direction, particularly relevant. These trades could benefit from the uncertainty surrounding ongoing US trade negotiations and Fed independence concerns.
