Morgan Stanley expects the euro to strengthen against a softer U.S. dollar in the first half of 2026, but warns those gains are unlikely to last. In its year-ahead FX outlook, the bank says the European Central Bank may face pressure to deliver additional rate cuts, taking the deposit rate down to 1.5% from 2.0%, which would weigh on the currency later in the year.
Strategists say the eurozone remains exposed to the lagged impact of tariff tensions, but they flag fiscal policy as the more significant challenge. Morgan Stanley argues that Berlin is likely to fall well short of its fiscal easing plans, providing far less economic support than markets expect—another factor that could drag on the euro after mid-year.
The bank forecasts the euro rising to $1.23 in H1 2026, before weakening to $1.16 by year-end as policy divergence and softer European fundamentals reassert themselves.
