Several leading Wall Street investment banks have reversed their previous positions, collectively abandoning their bullish outlook on the euro. The core rationale is that market pricing indicates the Federal Reserve's interest rate hikes in the second half of 2026 will significantly outpace those of the European Central Bank. The euro has already fallen to a one-year low this month, pressured by a trio of headwinds: diverging monetary policy expectations between the US and Europe, heightened safe-haven demand for the US dollar due to geopolitical conflict involving Iran, and a perceived conservative stance from the ECB. Major institutions have substantially lowered their euro-to-dollar exchange rate targets, and the options market is signaling extreme bearish sentiment for the medium to long term. Only a handful of firms maintain a neutral view, as funds previously betting on euro strength continue to exit. The historical pattern of energy shocks exerting long-term downward pressure on the euro is once again being validated.
Banks Slash Forecasts, Opening Path for Euro Depreciation
Top financial institutions, including JPMorgan Chase, Morgan Stanley, and BNY Mellon, now uniformly predict that the euro could depreciate by more than 3% against the US dollar, potentially testing the 1.10 level. The euro's exchange rate has already hit a one-year low this month, as trading capital fully prices in the possibility of Fed rate hikes in 2026 while no longer fully betting on the ECB following suit. This marks a stark reversal from market expectations at the start of the year.
In the first half of this year, the euro had surged to around 1.20, reaching a near five-year high, a time when European policymakers were concerned about currency appreciation hurting exports and the economy. However, conflict in the Middle East involving Iran has pushed up international oil prices, driving capital into the US dollar as a safe haven. This initiated a downtrend for the euro, which was further compounded by a more cautious policy stance from the ECB, causing the euro to fall completely out of favor with investors.
David Adams, a strategist at Morgan Stanley, stated that medium-term investors are unwinding large short positions on the US dollar. As the downtrend solidifies, speculative capital will continue to increase bets against the euro, making a move to 1.10 against the dollar a highly probable scenario.
JPMorgan Chase has directly revised its mid-2027 exchange rate target down to 1.10. Royal Bank of Canada forecasts this level could be reached by the end of next year, while Bank of America and Wells Fargo have also lowered their respective forecast points. Such a significant and collective downward revision is rare and has directly pulled down the average market expectation in surveys, whereas the previous consensus was for the euro to recover to 1.20 next year.
Options Sentiment Turns Overwhelmingly Bearish, Dollar Momentum Hard to Reverse
Options market data further confirms the pessimistic market outlook, with medium to long-term bearish sentiment on the euro reaching a cyclical peak. The one-year risk reversal indicator, which intuitively reflects market positioning and directional bias, is currently in its weakest zone for the euro since March 2025. Traders are facing higher costs to hedge against continued euro depreciation or to bet on further declines.
Marcus Jennings, an analyst at Wells Fargo, noted that the US dollar might experience minor fluctuations as it digests recent gains in the short term, but the underlying trend momentum for being long the dollar is strong, making contrarian positioning risky.
The core driver of the US dollar's strength stems from the starkly different policy signals from the Federal Reserve and the European Central Bank. New Fed Chair Kevin Warsh presided over his first policy meeting this month. While markets previously worried he might cut rates under political pressure, he explicitly stated he would not tolerate high inflation, prompting markets to heavily bet on rate hikes within the year. In contrast, ECB President Christine Lagarde, after implementing a rate hike this month, indicated no need for further policy tightening in response to economic shocks from Middle East geopolitics, expressing confidence that medium-term inflation would autonomously return to target.
ECB Rate Hikes Weigh on Economy, Slight Divergence in Institutional Views
Geoff Yu, an analyst at BNY Mellon, commented that the ECB's current rate hike cycle was arguably unnecessary from the start, as the hikes are dampening economic growth potential and further weakening the euro's fundamental support. While a break below 1.10 for EUR/USD is possible, they are not inclined to chase the short side blindly.
A small number of relatively moderate views persist in the market. Some institutions, citing the possibility that the Fed might abandon rate hikes or optimism about European economic resilience, maintain a neutral stance on the euro. For instance, while Bank of America has lowered its exchange rate forecast from 1.20 to 1.15, it has not turned unilaterally bearish. Nonetheless, market views firmly bullish on the euro are rapidly disappearing.
Kit Juckes, Chief FX Strategist at Société Générale, stated that the euro's upward trend is essentially over, noting that energy crises naturally exert downward pressure on the currency. He referenced the 2022 market dynamics as an example, where surging energy prices severely weakened Eurozone economic vitality, drawing a parallel to the current energy shock logic stemming from geopolitical conflict.
Synthesis and Outlook
Synthesizing the views of major institutions and market trading data, the core theme pressuring the euro is the misalignment of US and European monetary policy cycles, amplified by safe-haven demand for the US dollar due to geopolitical factors. This creates a clear medium-term depreciation trend for the euro.
Most investment banks are now focused on the key 1.10 level, bearish sentiment in the options market continues to build, and only a few institutions hold a neutral view. Potential energy-related shocks also continue to limit the euro's rebound potential. In the short term, there is insufficient fundamental support for taking a long position on the euro.
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