Euro: Two-phase weakness and recovery prospects against US Dollar – Commerzbank

Commerzbank’s Thu Lan Nguyen analyzes EUR/USD’s sharp decline since September, initially driven by broad US Dollar strength and later by Euro-specific concerns over France’s public finances. She argues that as long as German Bunds retain their safe-haven role, Euro downside should be limited, and projects EUR/USD recovering next year, with forecasts rising from 1.15 in December 2026 to 1.18 by December 2027.

Euro pressured but downside constrained

"EUR/USD has declined markedly since September. Initially, the move was driven by broad-based US dollar strength amid a more supportive interest rate outlook. Since early October, however, euro weakness has taken center stage, reflecting growing concerns over the sustainability of France’s public finances."

"That said, as long as German government bonds retain their safe-haven appeal, the euro’s downside should remain limited. With energy markets expected to ease and interest rate expectations to readjust, we see scope for EUR/USD to recover next year."

"EUR/USD fell to its lowest level since spring 2025 in mid-October. The downward move, which began in September, can be divided into two phases."

"We expect the US dollar to suffer more from such a correction than the euro, not least because lower energy prices should improve the economic outlook for the euro area by more than for the US. We therefore see further upside potential for EUR/USD next year."

"If, however, conditions in bond markets stabilize, we see scope for the single currency to recover in the short term. This is supported by the fact that, if necessary, the ECB has effective crisis-management tools at its disposal, such as the Transmission Protection Instrument (TPI)."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)