BNP Paribas forecasts US growth above potential in 2026, with GDP expanding 2.4% versus 2.1% in 2025. It expects inflation to overshoot at 3.8% in 2026 and to persist through 2028, linking the pressure to higher oil prices and tariffs. The bank also points to a split pattern in activity, associated with investment tied to AI and consumption concentrated among wealthier households.
On policy, BNP Paribas sees the Fed Funds target range holding at 3.5%–3.75% as the FOMC maintains a two-sided outlook. In foreign exchange, it projects a gradual USD depreciation against the euro, with EUR/USD at 1.21 by Q4 2026 before moving to 1.25 by Q4 2027. Its base case assumes a gradual normalisation in the Middle East while price tensions remain.
Gradual Dollar Depreciation and Exchange Rate Outlook
With the US economy showing strong growth, we see a gradual path of dollar depreciation against the euro ahead. The current EUR/USD exchange rate is trading around 1.18, and we anticipate it will reach 1.21 by the fourth quarter. This view is based on continued economic resilience and a diversification away from the dollar.
The Federal Reserve is expected to keep its target rate steady at 3.5% to 3.75% for the remainder of the year. The latest CPI data from May showed inflation holding at 3.7%, reinforcing the idea that the Fed has no immediate reason to cut rates. This stability from the central bank suggests any currency moves will be slow and orderly.
Options Strategy and Volatility Environment
For the coming weeks, we are looking at buying longer-dated EUR/USD call options, specifically those expiring in September or December 2026. A strike price around 1.20 seems appropriate to capture the anticipated upward drift. This strategy allows us to profit from the directional move without needing it to happen immediately.
Given the forecast for a very gradual appreciation, we also see an opportunity in the low volatility environment. The Cboe EuroCurrency Volatility Index is trading near 5.5, a multi-year low, which makes selling options attractive. We are considering selling out-of-the-money puts with July 2026 expirations to collect premium from the expected stability.
This outlook is reinforced by a steady European Central Bank, which held its own rate at 3.25% last month amid its own inflation concerns. Historically, a move for EUR/USD back towards 1.21 is not unprecedented, as it would simply be a return to levels seen in early 2021. The key factor is the slow, grinding nature of the expected move.
