The euro is set to strengthen against the U.S. dollar. The key question is when EUR/USD will be able to resume its upward trend. JP Morgan believes the main currency pair will rise to 1.22 by year-end but notes that the movement will not be linear. A correction is quite likely. The prerequisites for a pullback exist — the only question is whether it will happen.

The main "bullish" drivers for EUR/USD are named as divergences in monetary policy and economic growth, as well as erosion of confidence in the Fed due to Donald Trump's attacks on Jerome Powell. At present, the futures market expects the federal funds rate to fall by 100 basis points to 3.5% by mid-2026. Bloomberg experts forecast that the ECB's monetary easing cycle will soon end. The deposit rate will decline to 1.75%. Moreover, next year, amid accelerating GDP growth and inflation, it could even rise.

Dynamics of Central Bank Rates

For a long time, the U.S. economy outpaced Europe's thanks to fiscal stimulus. The U.S. pursued a path of spending, while the euro area tightened its belt. In 2025, the situation flipped. Germany loosened its purse strings, while America tried to offset the negative effects of Trump's "big and beautiful" tax cut law with tariff revenues. This allowed S&P Global Ratings to maintain the U.S. rating at AA+ with a "stable" outlook.

As a result, by 2026 it will be Europe that accelerates. Especially if the armed conflict in Ukraine comes to an end. Should that happen, EUR/USD, according to JP Morgan, could surge by 2.5%.

Pressure from the White House on the Fed will surely continue. The U.S. administration wants to reduce Treasury yields and weaken the dollar. There is no better way to achieve this than by resuming the Fed's monetary easing cycle. The erosion of trust in the central bank leads to diversification of investment portfolios in favor of European securities. The capital flow from the US to the EU is a powerful driver of an EUR/USD rally.

U.S. Inflation Dynamics and Fed Rate

Finally, history also supports an EUR/USD rally. The U.S. has already had an episode when the Fed cut rates while inflation was rising — in 2007–2008. Back then, the USD index dropped by 11% to a local bottom.

Thus, the combination of factors points to the continuation of the upward trend in the main currency pair in the medium and long term. However, a short-term pullback may occur. Its cause could be Powell's reluctance to signal a dovish shift by the Fed at Jackson Hole.

Technically, the daily EUR/USD chart shows continued short-term consolidation. A drop below fair value at 1.1650 would justify selling. Later, a rebound from support at 1.1550 and 1.1495 would allow traders to reverse positions and build longs in the euro against the U.S. dollar.