EUR/USD Price Annual Forecast: Growth to displace central banks from the limelight in 2026

• The European Central Bank and the Federal Reserve are likely to lose relevance in 2026.
• Trade tensions between China and the United States are unlikely to spread world chaos.
• EUR/USD bulls retain control but remain unconvinced as focus shifts to growth imbalances.

What a year! Donald Trump’s return to the United States (US) Presidency was no doubt what led financial markets throughout 2025. His not-always-unexpected or surprising decisions shaped investors’ sentiment, or better said, unprecedented uncertainty.

Tariffs then and now

Tariffs may sound like an old issue, but that was just a few months ago. After becoming the 46th President, Trump announced in April that he would equilibrate the US deficit by imposing massive tariffs on all trading counterparts. Such tariffs were meant to punish unfair trade practices and boost American manufacturing, according to Trump.

Of course, China was Trump’s biggest enemy in this so-called trade war, but neighbours Canada and Mexico were also at the top of the list.

Trump imposed levies on a myriad of goods and services entering the US, initially announcing 50% tariffs on steel and aluminum, but expanding it to over 400 other products in August.

Additionally, Trump used a federal law to declare a national emergency and increase tariffs on certain target countries. Through the International Emergency Economic Powers Act (IEEPA), the White House added levies on China, Canada, and Mexico in relation to fentanyl smuggling. He used the same tactic on India, as the country buys oil from Russia, and on Brazil, as a pressure tool on the current left-wing government.

Source: atlanticcouncil.org (White House Executive Orders and fact sheets, GeoEconomics Center research)

By the end of the year, there’s in place baseline 10% tariffs on all US trading partners, and roughly 60 other countries are subject to different levies.

In the case of China, average US tariffs on Chinese exports now stand at 47.5% and cover 100% of all goods. China's average tariffs on US exports are at 31.9% and cover 100% of all goods. US tariffs have risen by 26.8 % points since the second Trump administration began on January 20, 2025. Chinese tariffs have risen by 10.7% points over the same period, according to the Peterson Institute for International Economics.

Regarding Canada and beyond the 35% fentanyl tariffs, the country is also facing 10% for energy, energy resources, and potash, and 35% for all other products. In the case of Mexico, levies stand at 10% for potash and 25% for all other products.

Also, US President Trump has threatened to impose tariffs on multiple countries that are currently negotiating trade deals.

Tariffs took their toll on Federal Reserve’s decisions

Things around the Federal Reserve (Fed) have gone crazy throughout the year. The central bank anticipated, through the Summary of Economic Projections (SEP) released in December 2024, two interest rate cuts in 2025, finally delivering three, but not without pain.

Fed officials adopted a cautious stance in March, and the Federal Open Market Committee (FOMC) decided to keep interest rates steady at 4.5% for a second straight meeting, amid concerns that Trump’s tariffs would revive inflationary pressures. Chair Jerome Powell expressed that tariffs could delay progress in lowering inflation.

As months went by, tariff-related inflation concerns eased, and the Fed reviewed its SEP. The central bank delivered a 25 basis points (bps) rate cut in September, and anticipated two more in the docket. The central bank delivered in October, but shocked by hinting at no action in December. “A further reduction in the policy rate at the December meeting is not a foregone conclusion, far from it," Powell said. "There were strongly different views today. And the takeaway from that is that we haven't made a decision about December.”

The Fed ended up cutting the federal funds rate by 25 bps to a range of 3.5%–3.75% in its December meeting, bringing borrowing costs to their lowest level since 2022.

Still, it’s worth remembering the extreme division among the voting committee. Some officials have expressed a preference for more rapid rate cuts, while others have advocated continuing the cautious approach.

At the same time, and since adopting its cautious stance in March, Powell unleashed President Trump’s anger. Trump spent the year criticizing Powell’s conservative stance, demanding much lower interest rates, and even threatening to fire Powell, an attribution he does not have. Trump didn't hold back either on directly insulting Powell, calling him “Too Late,” a “major loser,” and a fool, among other things.

Trump also took it on Fed members who did not align with his aggressive idea. The most notorious decision was to select Stephen Miran, chair of the Council of Economic Advisors, to serve on the Federal Reserve Board of Governors, replacing Adriana Kugler. Miran is an advocate of lower rates and preferred 50 bps interest rate cuts in the last two meetings of the year.

What to expect from the Federal Reserve in 2026

According to the latest SEP, the Fed anticipates an interest rate cut in 2026 and another one in 2027. The market, however, believes policymakers will keep betting on at least two interest rate cuts in 2026. The reasoning behind such an idea stems from the fact that Jerome Powell’s mandate as Fed Chair ends in May 2026. President Trump may not have the authority to fire the Chair, but it is within his attributions to name a replacement.

Market participants anticipate the next Fed Chair will adopt a more dovish stance on monetary policy. Lower rates mean lower borrowing costs and hence, better profits. Hopes have sent Wall Street to record territory in 2025 despite the back-and-forth in the Fed’s path and Trump’s anger.

I want my new Fed Chairman to lower Interest Rates if the Market is doing well, not destroy the Market for no reason whatsoever. I want to have a Market the likes of which we haven’t had in many decades, a Market that goes up on good news, and down on bad news, the way it should be, and the way it was. Inflation will take care of itself and, if it doesn’t, we can always raise Rates at the appropriate time — But the appropriate time is not to kill Rallies, which could lift our Nation by 10, 15, and even 20 GDP points in a year — and maybe even more than that! A Nation can never be Economically GREAT if ‘eggheads’ are allowed to do everything within their power to destroy the upward slope. We are going to be encouraging the Good Market to get better, rather than make it impossible for it to do so. We are going to see numbers that are far more natural, and far better, than they have ever been before. We are going to, MAKE AMERICA GREAT AGAIN! The United States should be rewarded for SUCCESS, not brought down by it. Anybody that disagrees with me will never be the Fed Chairman!” Trump recently shared on social media.”

European Central Bank in a good place, not so the Eurozone

The European Central Bank (ECB) maintained the path set in 2024 and lowered interest rates eight times between June 2024 and June 2025, reducing the interest rate on the main refinancing operations, the interest rates on the marginal lending facility, and the deposit facility to 2.15%, 2.4%, and 2%, respectively.

Since then, ECB officials have maintained rates on hold and, while remarking that they are open to adjusting monetary policy as necessary, hinted at no more rate moves in the near future. ECB President Christine Lagarde said the central bank is in a “good place,” and repeated through the last meetings alongside the usual mantra of data-dependent and meeting-by-meeting approach.

Policymakers also welcomed economic resilience, despite real Gross Domestic Product (GDP) increasing by a modest 0.3% in the third quarter of 2025. The ECB upgraded it growth forecast, predicting it at 1.2% in 2026, 1.4% in 2027, and it is expected to remain at 1.4% in 2028.

Still, speaking about resilient growth seems overstretched. Manufacturing activity in the European Union (EU) kicked off the year on a firm footing, finding support on temporary front-loading ahead of US tariffs. The recovery, however, faded through 2025. As a reference, the Hamburg Commercial Bank (HCOB) Flash Manufacturing Purchasing Managers’ Index (PMI) fell to 49.2 in December 2025, the lowest in eight months.

Officials also acknowledged in the December meeting that the labor market remains strong in the EU, and remained optimistic about inflation. The latest ECB statement reads: “Inflation is projected to decrease from 2.1% in 2025 to 1.9% in 2026 and then to 1.8% in 2027, before rising to the ECB’s medium-term target of 2% in 2028.”

However, not all officials seem aligned with such an idea. The latest comments hint at mounting inflationary pressures. ECB Executive Board Member Isabel Schnabel suggested early in December that inflationary risks are now greater than the potential for an economic slowdown, while French representative François Villeroy de Galhau noted that “The downside risks on the inflation outlook remain at least as significant as the upside risks, and we would not tolerate a lasting undershooting of our inflation target.”

What to expect from the ECB in 2026

“We are quite close to potential, but there’s a lot to be done in terms of improving productivity in the euro area,” ECB President Christine Lagarde said at a Financial Times Global Boardroom event by the end of the year.

Speculation that the ECB may change course once again and hike rates in 2026 mounts as the year ends. But seems a bit too early call. Optimism about economic resilience is not actually economic resilience, but mere survival. The ECB may sound optimistic, but with persistently subdued growth, the odds for an interest rate hike should remain contained.

EUR/USD Technical Analysis: Painful way through the first half of 2026

The EUR/USD pair bottomed at 1.0177 in January and peaked at 1.1918 in September, ending the year with substantial gains around the 1.1800 mark. The long-term picture favors a bullish continuation, with the caveat that US steady growth, coupled with tepid European progress, should make the way up at least painful until a clearer picture emerges.

In the meantime, the weekly chart shows that the pair has managed to hold above a still flat 20 Simple Moving Average (SMA), with the latter roughly 700 pips above a bullish 100 SMA, a great sign for buyers. The Momentum indicator hovers around its 100 line, but the Relative Strength Index (RSI) indicator advances well into positive territory, supportive of the bullish case but not enough to confirm it.

The monthly chart for the EUR/USD pair seems far more encouraging for bulls. The pair develops close to its yearly peak, with a mildly bearish 200 SMA just above it. Meanwhile, a bullish 20 SMA advances below an also directionless 100 SMA, both of which are far below the current level. Finally, technical indicators are firmly in positive territory, in line with the dominant, but hidden, bullish trend.

The EUR/USD pair needs to overcome the 1.1920 price zone and the monthly 200 SMA to gain upward traction and revisit the 1.2230/60 area where the pair topped between February and June 2021. Once the latter is cleared, the rally is likely to continue towards the 1.2500 mark.

On the downside, the pair has relevant support at 1.1470, a long-term static level that has held through the years. Coming up next is the 1.1350 area, where buyers defended the downside in mid-2025. A clear break below the latter exposes the 1.1000 psychological mark.

Will central banks maintain their influence on financial markets in 2026?

2025 revolved around central banks and tariffs. Tariffs have become less of an issue over time, and despite worldwide policymakers remaining wary of their impact on inflation, most officials, including Fed Chair Jerome Powell, acknowledged that it is likely to be a "one-time price increase.”

Indeed, trade tensions between the US and China are likely to persist, but it is unlikely that the trade war would extend beyond the two largest economies in the world.

Regarding central banks, both the ECB and the Fed reportedly focus on inflation and employment, but they can’t ignore growth.

As mentioned, economic progress in the EU has been tepid. The US, however, reported annualized GDP growth of 4.3% in the third quarter, following a 3.8% gain in the second quarter. Indeed, the US economy is doing far better than the European one.

Right now, central banks’ imbalances should be favoring the Euro, given the wide gap between them. In fact, the benchmark ECB policy interest rate is roughly half the Fed Funds rate.

Source: Bank for International Settlements; Oxford Analytica

But the US widely surpasses the EU in growth, which pretty much balances the scale. Thinking ahead, interest rates won’t matter if the imbalance in economic growth continues. The USD could turn the tide, despite interest rates gaps.

At this point, market players seem overly optimistic and are placing too much hope in central banks. Beyond the noise of a new Fed Chair, central bankers may slowly lose the limelight through 2026, with the focus shifting to growth.