## What the ECB's Standstill Outlook Means for EUR/USD Trading in 2026

The central bank divergence narrative is back in focus. While the Federal Reserve has already delivered three rate cuts since September and signals more easing ahead, the European Central Bank remains motionless—holding its main refinancing rate at 2.15% since July and showing no urgency to move in either direction. This policy divergence is the primary driver of currency movement, but the outlook hinges on whether Europe's growth holds up and how quickly the rate gap between Washington and Frankfurt actually closes.

### The ECB's Patience: Not a Policy Tilt, Just a Wait-and-See Posture

The ECB left all three key rates unchanged in December, with the deposit rate holding at 2.00% and the marginal lending facility at 2.40%. President Christine Lagarde signaled after the meeting that policy sits in a "good place," deliberately avoiding any hint of urgency for policy action. This measured approach reflects two offsetting forces: growth remains disappointingly soft, yet inflation refuses to retreat cleanly toward the bank's 2% medium-term target.

Eurostat figures showed inflation at 2.2% year-on-year in November, above the ECB's target. More troubling for policymakers is the composition—while energy prices fell 0.5%, services inflation jumped to 3.5% from 3.4%, a category central banks monitor closely because it typically proves sticky and resistant to policy tightening. This keeps the ECB's outlook meaning crystal clear: hold steady and avoid signaling either hawkishness or dovishness until the picture clarifies.

Market expectations align with this view. A Reuters poll found most economists expect rates to remain unchanged through 2026 and 2027, though forecasts for 2027 scatter widely (1.5%–2.5%), signaling confidence erodes the further ahead you project. Christian Kopf from Union Investment mirrors this stance, noting that if any ECB move materializes in 2026, late-year or early 2027 remains more likely—and a hike rather than a cut would be the direction.

### The Fed's Easing Bias: Three Cuts Done, More Likely Coming

The Federal Reserve ended 2025 with three rate cuts totaling 75 basis points, exceeding its December 2024 forecast of two cuts. The federal funds target now sits at 3.5%–3.75%. Politics adds another layer: Jerome Powell's term expires in May 2026, and he faces no reappointment expectation. Trump has signaled that the next Fed chair would likely move more aggressively on easing than Powell did.

Major banks have already positioned themselves: Goldman Sachs, Morgan Stanley, Bank of America, Wells Fargo, Nomura, and Barclays collectively expect roughly two cuts in 2026, potentially taking the federal funds rate to 3.00%–3.25%. Moody's chief economist Mark Zandi warns that while cuts may come, it's not because growth is robust—rather, the economy sits in a fragile "delicate balance" where rate support becomes necessary.

### The Eurozone's Growth Challenge: Weak But Holding

Europe's output is undeniably sluggish. In Q3, the eurozone expanded just 0.2%, though Spain (0.6%) and France (0.5%) outperformed while Germany and Italy stalled. The European Commission's autumn forecast captures this uneven tempo: 1.3% growth for 2025 (revised up), 1.2% for 2026 (revised down), and 1.4% for 2027—a signal that 2026 may prove bumpier than currently priced in.

Structural headwinds compound cyclical weakness. Germany's auto sector, buffeted by the EV transition and supply disruptions, saw output fall 5%. Innovation underinvestment has left Europe lagging the US and China in critical tech domains. Trade risk has also resurfaced: the Trump administration's "reciprocal tariff" framework poses a 10–20% levy threat on EU goods, with EU exports to the US already facing pressure (down 3%), particularly in autos and chemicals.

Yet the headline is crucial: it's slow growth, not collapse. This baseline resilience is precisely why the euro doesn't appear fundamentally broken, even as growth disappoints relative to America.

### The Currency Outlook: Two Scenarios for EUR/USD in 2026

EUR/USD in 2026 ultimately rests on a simple trade-off: the margin between European resilience and American momentum, mediated by the ECB's patience versus the Fed's cutting pace. Markets trade both the numbers and the narrative, so direction depends on which scenario plays out:

**Scenario 1: Europe Muddles Through, Fed Keeps Cutting**
If eurozone growth holds above 1.3% and inflation edges up only gradually, the ECB maintains its hold-steady posture while Fed cuts continue. The rate differential narrows but in a way that supports the euro—yield spreads compress because the Fed is easing, not because the ECB suddenly panics. In this case, EUR/USD has room to probe above 1.20, potentially moving toward the mid-1.20s by mid-2026. UBS Global Wealth Management (represented by EMEA CIO Themis Themistocleous) backs this angle: narrowing yield gaps amid ongoing Fed easing should support upside.

**Scenario 2: Growth Disappoints, Trade Shock Bites**
If eurozone output disappoints (below 1.3%), trade friction escalates, and the ECB is forced to shift toward accommodative cuts to support activity, the euro's rally hits a wall. EUR/USD would likely retreat toward the 1.13 support zone, with potential downside extending to 1.10. This scenario assumes the ECB "blinks" under growth pressure while tariff headwinds deepen—a toxic combination for the euro.

Institutional forecasts diverge sharply around these scenarios. Citi expects the dollar to strengthen, projecting EUR/USD at 1.10 by Q3 2026 (roughly a 6% drop from current levels around 1.1650), on assumptions that US growth re-accelerates and Fed cuts disappoint relative to market expectations. Conversely, UBS sees the rate-differential dynamics supporting the euro higher toward 1.20 by mid-2026 if the Fed maintains its easing path while the ECB holds.

The key takeaway: EUR/USD in 2026 is less about absolute policy rates and more about the divergence narrative—which central bank moves first, why, and whether growth trajectories support or undermine that move.