ING expects EUR/USD to rise through the rest of 2026 as US short-term rates fall and US growth slows in the second half of the year. It forecasts two Federal Reserve cuts this year and says stronger Eurozone data should support the pair.
The bank does not expect the US dollar’s 2026 decline to be as large as its 2025 drop. It highlights US risks such as high equity valuations, fiscal problems, and political uncertainty ahead of the midterm elections.
Year End Target And Hedging Dynamics
ING sets a year-end target of 1.22 for EUR/USD. It also notes that high dollar hedging costs have kept hedge ratios low. It describes last year’s EUR/USD hedging levels as underhedged, especially early in the year.
Its base case assumes a 50bp Fed cut while the ECB keeps rates unchanged. That would lower dollar hedging costs. In this scenario, ING expects dollar hedge ratios to rise to about 74% by year-end.
The article says it was created with an AI tool and reviewed by an editor.
Because the outlook for the US dollar is bearish for the rest of 2026, we believe traders should consider positioning for a higher EUR/USD rate. This could mean taking long positions, such as using futures contracts or buying euro call options. Since ING expects a gradual rise, traders may prefer to build positions over time instead of making one large entry.
Policy Divergence And Trading Approach
This view is backed by recent data showing the US and Eurozone moving in different directions. Last week’s US January retail sales report showed a 0.5% drop, which points to weaker consumer demand. Meanwhile, Germany’s latest IFO Business Climate index rose slightly to 92.1, suggesting a slow recovery is starting. Together, these signals support the idea that momentum is shifting toward the Eurozone.
We expect the Federal Reserve to start cutting rates around mid-year. Markets are pricing in about a 70% chance of a first 25bp cut at the June meeting. By contrast, the European Central Bank is expected to keep rates steady. This would narrow the interest rate gap and reduce support for the dollar. This policy split is the main reason behind the forecast for EUR/USD to rise.
In 2025, the dollar weakened and EUR/USD climbed from about 1.10 to above 1.18. That move helped set up today’s environment. This year’s rise is expected to be slower, but the trend is still higher. As US short-term rates fall, the cost of hedging the dollar should drop. That can lead to more hedging activity, which may weigh on the dollar over time.
Because the expected move is a steady “grind higher” rather than a sharp rally, EUR/USD implied volatility may stay fairly low. Traders could look at strategies that benefit from this, such as selling out-of-the-money puts to earn premium while keeping a bullish bias. This can fit a slow move toward the 1.22 year-end target, aiming to gain from both the direction and time decay.
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