Deutsche Bank targets EUR/USD 1.25 by end-2026 as Europe heals and dollar tailwind fades
The euro could rally over the next two years, with Deutsche Bank projecting EUR/USD at 1.25 by end-2026, contingent on a global growth upturn, a cyclical recovery in Europe—led by Germany—and a softer U.S. dollar if Asian FX stabilizes and strengthens.
Deutsche Bank’s thesis: a multi-factor push for the euro
Deutsche Bank’s year-end FX outlook argues EUR/USD can climb from roughly 1.1560 today to 1.25 by end-2026, expecting the pair to break above 1.20 during 2026. The bank cites:
– An improving global growth backdrop that typically lifts pro-cyclical currencies like the euro.
– A European cyclical rebound centered on Germany, which could narrow growth differentials with the U.S.
– A potential peace dividend if the Russia–Ukraine conflict de-escalates, supporting European risk sentiment and capital flows.
The bank also points to the euro area’s solid external position as a buffer and suggests reserve managers could incrementally diversify into euros as a perceived safe alternative, adding structural support.
Asian FX is the swing factor for a softer dollar
The call relies heavily on a recovery in undervalued Asian currencies—especially the yen and the yuan. A firmer JPY and CNY would pressure the U.S. dollar lower on a broad basis, creating room for EUR/USD to advance. If the yen and yuan fail to strengthen, the euro’s path to 1.25 becomes materially less certain.
Market context: what traders are watching
– Policy rate expectations: A sustained narrowing of U.S.–eurozone rate differentials would favor EUR/USD. If U.S. yields drift lower on softer inflation or growth, the dollar would likely lose altitude.
– European data pulse: Signs of German industrial stabilization and broader eurozone PMI improvement would validate the cyclical upswing narrative.
– Geopolitics and energy: Any de-escalation in Eastern Europe could reduce risk premia on European assets. Conversely, energy shocks would hurt the euro’s terms of trade.
– Reserve flows: Incremental reserve diversification toward the euro would be a slow-burn but supportive flow, BPayNews notes.
Risks that could derail the call
– Persistent U.S. outperformance and higher-for-longer Treasury yields.
– ECB turning more dovish than the Fed, widening rate differentials against the euro.
– Asian FX remaining weak, keeping the broad dollar bid.
– Renewed geopolitical stress or energy price spikes weighing on Europe’s external balance.
Key Points
- Deutsche Bank projects EUR/USD at 1.25 by end-2026, from about 1.1560 currently.
- Bank expects the pair to break above 1.20 during 2026 amid global and European cyclical recovery.
- Asian FX recovery (yen, yuan) is pivotal to a weaker dollar that enables euro upside.
- Europe’s solid external position and potential reserve manager diversification viewed as supportive.
- Risks: persistent U.S. growth/yield advantage, dovish ECB relative to Fed, Asia FX weakness, energy/geopolitical shocks.
What it means for FX strategy
Traders may focus on rate spreads, U.S. data surprises, and Asia FX momentum as near-term drivers of dollar direction. Crosses such as EUR/JPY and EUR/CNH could offer cleaner expressions of the Asia leg of the thesis. On EUR/USD, dips tied to transient U.S. data beats or headline risk could prove tactical if the macro glidepath tilts toward narrower U.S.–EU growth and yield gaps.
FAQ
What is Deutsche Bank’s EUR/USD forecast?
Deutsche Bank expects EUR/USD to reach 1.25 by the end of 2026, with a move above 1.20 anticipated during 2026.
What are the main drivers behind the bullish euro view?
An improving global growth cycle, a European rebound led by Germany, potential de-escalation in the Russia–Ukraine conflict, a solid euro area external position, and possible reserve manager diversification into euros.
Why does Asian FX matter for this call?
A recovery in the yen and yuan would likely weaken the broad U.S. dollar, creating the conditions for EUR/USD to advance. If Asian currencies stay soft, the euro’s upside path is less reliable.
What could invalidate the forecast?
U.S. economic outperformance and higher-for-longer yields, an ECB that eases more than the Fed, renewed energy or geopolitical shocks in Europe, and continued weakness in Asian currencies.
When might EUR/USD clear 1.20 according to the bank?
Deutsche Bank expects a break above 1.20 sometime in 2026, as the growth and policy backdrop becomes more euro-supportive.
What indicators should traders monitor?
U.S.–eurozone rate differentials, U.S. inflation and payrolls, eurozone PMIs and German industry data, moves in JPY and CNY, and energy prices/geopolitical developments.
Last updated on November 25th, 2025 at 10:41 pm
