Euro-Dollar to Strengthen into Mid-2026: Wells Fargo
- Written by: Gary Howes
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However, $1.20 might be out of reach.
Wells Fargo expects the euro to strengthen steadily against the U.S. dollar into the middle of 2026 as the Federal Reserve embarks on an extended rate-cutting cycle and global growth momentum improves.
The U.S. banking giant says in its October forecast update that broad dollar depreciation remains a theme over the next year.
This, thanks to a combination of "aggressive Fed easing and moderating international central bank policy space."
The new research explains lower U.S. interest rates will tilt yield differentials in favour of foreign currencies such as the euro, setting the stage for EUR/USD to rise through to mid-2026.
"Near term, we continue to believe the dollar will trend weaker as Federal Reserve interest rate cuts place interest rate differentials in favour of foreign currencies," says Wells Fargo.
Analysts say current forecasts still reflect a dollar weakening trend that should "extend into the middle of next year."
However, the path is not expected to be smooth.
Wells Fargo cautions that with "investor positioning for further dollar depreciation looking a bit stretched" and "a myriad of risks outstanding," a temporary bout of U.S. dollar strength is possible before the downtrend resumes.
The observation comes amidst a USD comeback during recent weeks, which has pressured the euro to dollar exchange rate from a mid-September high at 1.19 back to 1.16 at the time of writing.
The team ties the expected dollar softness directly to the duration of the Fed’s easing cycle, saying the greenback’s decline should "match the length of the Fed’s easing cycle."
Economists at Wells Fargo look for rate cuts to continue into the middle of next year, which would leave "scope for the dollar to weaken into Q2 2026."
Wells Fargo says the Fed will also quit the process of quantitative tightening (QT) - whereby it sells a portion of the bonds it accumulated during its various quantitative easing programmes.
"Hints that the Fed may end its quantitative tightening cycle by the end of this year should also contribute to a weaker dollar over the coming quarters.
Beyond that period, though, Wells Fargo’s outlook turns. By the second half of 2026, the bank expects the dollar to recover as the easing cycle winds down and relative yields stabilise at still-attractive levels.
"By H2-2026, we expect the easing cycle to end with a fed funds rate of 3.25%. A terminal fed funds rate of 3.25% is, relative to where the fed funds rate has been over the past 25 years, somewhat elevated," says the bank.
The euro is forecast to peak at $1.18, a level that might disappoint those readers looking for anything in excess of $1.20.
