ING expects EUR/USD to rise through the rest of 2026 as US front-end rates fall and US growth slows in the second half of the year. It forecasts two Federal Reserve cuts this year and sees stronger Eurozone data supporting the pair.
The bank does not expect the US dollar’s 2026 fall to match the size of its 2025 drop. It points to US risks such as equity valuations, fiscal issues, and political uncertainty before the midterm elections.
Year End Target And Hedging Dynamics
ING sets a year-end target of 1.22 for EUR/USD. It also notes that high dollar hedging costs have kept dollar hedge ratios low, with EUR/USD hedging levels described as underhedged early last year.
Its baseline case assumes a 50bp Fed cut while the ECB keeps rates unchanged, which would reduce dollar hedging costs. Under this scenario, it expects dollar hedge ratios to rise to about 74% by the end of the year.
The article states it was produced using an AI tool and reviewed by an editor.
Based on the bearish outlook for the US dollar for the remainder of 2026, we believe traders should consider positioning for a higher EUR/USD exchange rate. This suggests establishing long positions, potentially through futures contracts or by purchasing call options on the euro. The forecast for a gradual move higher means these positions might be built over time rather than in a single aggressive entry.
Policy Divergence And Trading Approach
This perspective is supported by recent data showing a divergence between the US and Eurozone economies. Last week’s US retail sales report for January showed a 0.5% contraction, hinting at a cooling consumer, while Germany’s latest IFO Business Climate index edged up to 92.1, suggesting a slow recovery is underway. This reinforces the idea that economic momentum is shifting in favor of the Eurozone.
We anticipate the Federal Reserve will begin cutting rates mid-year, with the market currently pricing in a 70% probability of a first 25bp cut by the June meeting. In contrast, the European Central Bank is expected to hold its policy rate steady, creating a narrowing interest rate differential that disfavors the dollar. This policy divergence is the central pillar of the forecast for EUR/USD to appreciate.
Looking back, the dollar’s decline we witnessed in 2025, when EUR/USD moved from around 1.10 to over 1.18, set the stage for the current environment. This year’s move is expected to be more measured, but the underlying direction remains the same. The lower cost of hedging the dollar, driven by falling US short-term rates, should encourage more hedging flows, which will act as a persistent headwind for the greenback.
Given the expectation of a “grind higher” rather than a volatile surge, implied volatility in EUR/USD may stay relatively low. Traders could consider strategies that benefit from this, such as selling out-of-the-money puts to collect premium while expressing a bullish bias. This approach aligns with a steady appreciation towards the 1.22 year-end target, capturing gains from both the direction and the passage of time.
