EUR/USD Weakens, as Year-End Forecast Clouded

The euro has edged lower against the dollar today, as rising oil prices reignite inflation concerns across energy-import-dependent European economies, complicating the outlook for the single currency despite a broadly constructive consensus among major financial institutions for year-end 2026.

EUR/USD has retreated to the high 1.16 range today, down 0.4%, as markets digest the twin pressures of geopolitical risk and shifting central bank rhetoric. The dollar index has benefited from safe-haven flows, climbing approximately 1.2% over the past month as the Iran war escalation and subsequent oil supply disruption have driven risk-off sentiment across global markets.

The immediate catalyst for euro weakness has been the largest oil supply disruption in modern history, stemming from the closure and partial closure of the Strait of Hormuz amid the ongoing Iran conflict. Brent crude prices have surged, pushing headline inflation expectations higher across the euro area and raising the spectre of stagflation in a region already grappling with anaemic growth. Europe’s status as a major net energy importer leaves it particularly exposed to this shock, with analysts warning that a prolonged blockade through the summer refill season could tip several euro-area economies into recession.

Against this challenging backdrop, European Central Bank Executive Board member Isabel Schnabel has emerged as a key hawkish voice, signalling that policymakers may need to act even as growth risks mount. In a late May speech, Schnabel argued that the Iran-war-driven inflation spike is now too broad-based to “look through,” citing damage to energy infrastructure and mounting pass-through risks to core prices. She explicitly hinted that rate hikes remain on the table, even if the conflict were to end immediately, marking a notable shift from the ECB’s earlier wait-and-see posture.

In April remarks, Schnabel had described the ECB as being in a “comparatively comfortable” starting position but emphasised the need to monitor second-round effects in wages and prices. The hawkish pivot has led markets to reprice expectations, with some analysts now factoring in the possibility of ECB rate increases or at least a prolonged plateau at restrictive levels, at a time when the Federal Reserve is widely expected to be moving toward easing in the second half of 2026.

EUR/USD Forecast

Yet despite the near-term headwinds, major analysts and brokers maintain a broadly constructive view on the euro’s prospects into year-end. A comprehensive survey of sell-side forecasts shows that year-end 2026 EUR/USD projections from major banks span a range of 1.10 to 1.25, with the central cluster of estimates sitting around 1.20 to 1.22. The median forecast implies a roughly 3% to 5% upside from current levels, reflecting expectations that dollar weakness will eventually reassert itself as the Fed’s easing cycle progresses.

Bank of America maintains one of the most bullish calls, targeting 1.22 for year-end 2026. The U.S. bank expects most dollar weakness to materialise after early 2026 as Fed rate cuts come into clearer view, and sees a lower bar for positive surprises in European data given depressed expectations. BofA emphasises that higher real rates in Europe versus market expectations should prove supportive for the euro as inflation moderates while nominal policy rates remain relatively firm.

Not all forecasters share this optimism. Société Générale expected EUR/USD to peak around 1.20 before retreating to 1.14 by year-end 2026, reflecting a view that U.S. economic resilience may prevent a deep Fed easing cycle while Europe-specific growth issues reassert themselves. This more cautious stance seems to be playing out at this time.

BNP Paribas Wealth Management sits at the upper end of the forecast range with a target of 1.24, emphasising a weaker dollar as U.S. fiscal concerns and eventual Fed cuts dominate the narrative. The French bank sees the euro as a prime beneficiary when global risk appetite improves and investors rotate out of over-owned dollar assets.

Outlook

The hawkish shift at the ECB, while raising near-term recession risks, could ultimately prove supportive for the euro if it succeeds in anchoring inflation expectations and demonstrating the central bank’s commitment to price stability. Markets are increasingly pricing the possibility that the ECB will maintain a tighter policy stance for longer than previously anticipated, potentially narrowing the rate gap with the Fed from the European side of the equation.

Positioning data suggests that forex traders remain relatively cautious on the euro, with net long positions well below historical peaks. This under-ownership 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 remain the dominant theme. If the oil shock proves transitory and inflation pressures ease over the coming months, the ECB may be able to avoid the policy tightening that Schnabel has flagged, allowing growth concerns to recede and supporting the euro’s medium-term appreciation path. However, if inflation proves stickier and the ECB is forced to hike rates into a weakening economy, the stagflation narrative would gain traction and likely cap the currency’s upside potential.