Revised GDP forecasts for 2026 suggest growth rates of 2.1% in the US and 1.2% in the Eurozone, an increase from previous estimates. Despite these adjustments, the dollar has stabilized without a rally.
In April, forecasts indicated 1.2% growth for the Eurozone and 1.4% for the US. The improved US growth outlook has not shifted market rate differentials, keeping the end-2026 Fed Funds rate at 3%.
Eurozone Economic Changes
Meanwhile, the Eurozone’s growth expectation has been slightly raised from 1.1% to 1.2%, aligning with a decrease in expectations for ECB rate cuts. This change is driven more by ECB rhetoric than economic fundamentals.
We are seeing growth forecasts for 2026 rise to 2.1% in the US and 1.2% in the Eurozone, a significant jump from the estimates we saw back in April of last year. However, the market reaction has been uneven, with the dollar stabilizing while Euro rate cut expectations are being pared back. This divergence between fundamentals and policy expectations is where the opportunity lies for us in the coming weeks.
In the US, the improved growth outlook has not led to expectations of higher interest rates, with the market still pricing in a 3% Fed Funds rate for the end of this year. This is likely because recent inflation data, like the core PCE figures from late 2025 which showed a continued cooling trend to 2.8%, suggests the Fed can tolerate stronger growth without needing to hike. For traders, this points toward selling volatility on US interest rate futures, as Fed policy appears stable and predictable for now.
European Central Bank Influence
The situation in Europe is quite different, as a very modest growth upgrade is being met with increasingly hawkish talk from the European Central Bank. This rhetoric, more than the economic data itself, is causing the market to price out anticipated rate cuts. With Eurozone HICP inflation in December 2025 remaining sticky around 2.5%, we should anticipate that any upcoming comments from ECB officials could create significant price swings.
This dynamic suggests a relative value trade in currency derivatives. With US rates anchored by tame inflation and European rates being talked up despite weaker growth, the upside for the EUR/USD pair appears limited. We could consider options strategies that profit from the pair remaining in a defined range, reflecting a strong but non-accelerating dollar against a rhetorically supported euro.
