Revised GDP forecasts for 2026 show growth rates of 2.1% for the US and 1.2% for the Eurozone, both up from earlier estimates. Despite these changes, the US dollar has remained stable without any significant rise. In April, the growth outlook was 1.2% for the Eurozone and 1.4% for the US. The improved forecast for US growth hasn’t affected market interest rates, keeping the end-2026 Fed Funds rate at 3%.

Eurozone Economic Changes

The Eurozone’s growth forecast has been slightly improved from 1.1% to 1.2%. This adjustment also reflects lower expectations for rate cuts from the European Central Bank (ECB). The shift is more influenced by ECB statements than by actual economic data. We now see 2026 growth forecasts at 2.1% for the US and 1.2% for the Eurozone, a notable increase from last April. However, the market has reacted inconsistently, with the dollar holding steady while Eurozone rate cut expectations have decreased. This gap between economic fundamentals and policy expectations presents opportunities for us in the coming weeks. In the US, the better growth outlook hasn’t raised interest rate expectations. The market is still projecting a 3% Fed Funds rate by the end of the year. This is likely due to recent inflation data, like the core PCE figures from late 2025, which showed a cooling trend at 2.8%. This suggests the Fed can support stronger growth without needing to raise rates. Traders might find value in selling volatility on US interest rate futures, as Fed policy currently appears steady and reliable.

European Central Bank Influence

The situation in Europe is quite different. The slight growth upgrade is accompanied by increasingly hawkish statements from the European Central Bank. This communication, more than the actual economic data, is influencing the market to scale back expected rate cuts. With Eurozone HICP inflation remaining around 2.5% in December 2025, we should be ready for potential price swings from any upcoming comments by ECB officials. This situation suggests that currency derivatives could present a relative value trade. With US rates steady due to mild inflation and European rates being discussed more positively despite weaker growth, the potential for the EUR/USD pair to rise looks limited. We might want to explore options strategies that benefit from this pair staying within a certain range, reflecting a strong but stable dollar against a euro supported by rhetoric. Create your live VT Markets account and start trading now.

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