BNP Paribas expects the US Dollar to depreciate gradually against the euro, with EUR/USD reaching 1.21 by the end of 2026 and 1.25 a year later, as diversification away from dollar assets and a steady Federal Reserve pave the way for a weaker greenback.
BNP Paribas expects the US Dollar to depreciate gradually against the euro, with EUR/USD reaching 1.21 by the end of 2026 and 1.25 a year later, as diversification away from dollar assets and a steady Federal Reserve pave the way for a weaker greenback.
BNP Paribas forecasts a gradual depreciation of the US Dollar against the euro, projecting EUR/USD at 1.21 by Q4 2026 and 1.25 by Q4 2027, as diversification from dollar assets and a steady Fed weigh on the greenback.
"The USD depreciation against the EUR should resume, albeit very gradually, amid broader diversification away from the dollar," BNP Paribas economists wrote in a research note Monday.
The French bank expects the US economy to grow 2.4% in 2026, above potential, while inflation overshoots at 3.8% because of higher oil prices and tariffs. The Fed Funds target range is seen steady at 3.5% to 3.75%, with the Federal Open Market Committee adopting a two-sided outlook that signals equal readiness to hike or cut. The Fed last changed rates in September 2025, delivering a 25-basis-point cut that brought the target range to its current level. OIS markets currently price a roughly 55% probability of a hold at the next meeting in July, with the first full cut not fully priced until early 2027.
The call places BNP Paribas near the upper end of sell-side forecasts, where year-end 2026 EUR/USD projections cluster around 1.20 to 1.22. Bank of America targets 1.22, while BNP Paribas Wealth Management sees 1.24. Societe Generale is more cautious at 1.14, reflecting a view that US economic resilience may limit the depth of Fed easing. The median forecast implies a roughly 3% to 5% upside from current levels.
Rate differentials and the ECB factor
EUR/USD traded at 1.1680 Monday, down 0.4% on the day, as the dollar index climbed about 1.2% over the past month on safe-haven flows tied to Middle East tensions. The immediate headwind for the euro has been the largest oil supply disruption in modern history, with Brent crude surging after the closure of the Strait of Hormuz during the Iran conflict. Europe's status as a major net energy importer leaves it exposed, with analysts warning that a prolonged blockade through the summer refill season could tip several euro-area economies into recession.
Yet the European Central Bank may complicate the dollar-bearish narrative. Executive Board member Isabel Schnabel signaled in late May that the Iran-war-driven inflation spike is too broad-based to "look through," hinting that rate hikes remain on the table even if the conflict ends immediately. That hawkish pivot has led markets to reprice expectations, with some analysts now factoring in the possibility of ECB tightening at a time when the Fed is widely expected to move toward easing in the second half of 2026. The last time the Fed adopted similarly two-sided language was in mid-2024, which preceded a period of dollar weakness as markets interpreted the stance as dovish-leaning.
What's at stake for currency markets
If BNP Paribas's base case materializes, the euro's appreciation would represent a roughly 3% to 5% gain from current levels by year-end. Positioning data suggests forex traders remain relatively cautious on the euro, with net long positions well below historical peaks — a setup that could amplify upside moves if the fundamental backdrop improves, as a rush to add exposure would compound any technical breakout above resistance levels.
The interplay between growth, inflation, and central bank policy will determine the outcome. If the oil shock proves transitory and inflation pressures ease over the coming months, the ECB may avoid the tightening Schnabel flagged, allowing growth concerns to recede and supporting the euro's medium-term appreciation path. If inflation proves stickier and the ECB is forced to hike into a weakening economy, the stagflation narrative would gain traction and likely cap the currency's upside. BNP Paribas's base case assumes a gradual normalization of the Middle East situation with persistent price tensions — a scenario that keeps the dollar on a slow decline but leaves room for volatility spikes along the way.
This article is for informational purposes only and does not constitute investment advice.
