– Written by
Frank Davies
STORY LINK Euro to Dollar Forecast: Fed Credibility Tested as EUR/USD Volatility Surges
The Euro to Dollar exchange rate (EUR/USD) has swung sharply around the 1.20 level as markets grapple with Federal Reserve credibility, political pressure on monetary policy, and the fallout from Kevin Warsh’s expected nomination as the next Fed Chair.
While the move briefly stabilised the dollar after a 55-month EUR/USD high, investors remain wary that lingering policy uncertainty could reignite dollar selling.
EUR/USD Forecasts: Crucial Fed
UBS considers that the Euro to Dollar (EUR/USD) exchange rate can strengthen further in the short term, but expects the end-2026 rate will be held at 1.20.
ING has a year-end target of 1.22 amid on-going dollar vulnerability.
According to ING; “Bullish sentiment on the global economy continues to challenge the US exceptionalism narrative, while geopolitics, fiscal risks and now the threat of joint FX intervention are all hitting the dollar, too. Our preference remains for a broader dollar sell-off occurring later in the year.”
The dollar posted sharp losses early in the week with on-going unease over the geo-political stance, coupled with talk that the Administration would push for a weaker dollar.
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In this context, there was speculation that global hedge funds would increase their hedging ratios on US assets and EUR/USD surged to a 55-month high close to 1.2090.
Fed policy and potential threats to its independence remained a key element.
The Federal Reserve held rates at 3.75% with a slightly hawkish statement which helped stabilise the dollar and there was a more decisive recovery late in the week amid talk, later confirmed, that Kevin Warsh would be nominated as the next Fed Chair.
EUR/USD retreated sharply to lows at 1.19 before stabilising.
ING commented; “It’s good news for the dollar, which can price out some risks of a more dovish pick.”
Rabobank commented; “The market may respond optimistically to the prospect of Warsh’ nomination, but broader US policy uncertainty is still not doing the dollar any favours.”
UBS notes that the dollar has been under notable pressure due to fears over geo-political developments over Greenland and threats of additional tariffs.
According to the bank; “We believe that the combination of these recent developments has prompted international investors to price in a USD risk premium. The sharp rally of gold or precious metals in general reflects investors’ unease over political and geopolitical developments as of late.”
It notes that the selling could continue in the near term, but is cautious over the potential for sustained losses
According to the bank; “policymakers are expected to push back against excessive USD weakness, just as European officials would resist an overly strong euro. Third, US economic data will likely prove robust enough to end the Fed’s easing cycle in 1H26. Collectively, these factors make it hard for EURUSD to trade materially higher than 1.20 in the coming months.”
UBS also noted that there are important upside and downside dollar risks
According to the bank; “Further turbulence at the Federal Reserve would open the door for a EURUSD closer to 1.25. Meanwhile, the prospect for renewed US exceptionalism and European growth failing to accelerate in 2026 could bring EURUSD to 1.15 or lower.”
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TAGS: Euro Dollar Forecasts
