EUR/USD Outlook: Euro Gains Safe-Haven Status Amid Tariff Turmoil, Analysts Expect Continued Strength Through 2026

The euro has emerged as a de facto safe-haven currency and the best alternative to the U.S. dollar in the wake of the so-called “Liberation Day,” which triggered turmoil across financial markets. According to analysts at Ebury, the EUR/USD pair has room to climb further, especially as economic performance between the U.S. and the eurozone begins to converge and Germany rolls out massive fiscal stimulus. However, aggressive interest rate cuts by the European Central Bank (ECB) could weigh on the euro in the short term.

Key Takeaways:

• The euro is trading at its strongest level since late 2021.
• Investors increasingly see the euro as a safe-haven asset.
• The eurozone economy grew by 0.4% quarter-on-quarter in Q1 2025.
• Tariffs have clouded growth prospects; PMI data indicates stagnation.
• ECB is expected to cut interest rates in June and beyond.
• Ebury forecasts further EUR/USD gains through 2025–2026.

Euro Strength Defies Market Expectations

Despite market instability, EUR/USD surged past 1.15 in April, its highest level since the end of 2021. Eroding confidence in U.S. assets—following the imposition of steep tariffs—has fueled demand for the euro, which investors now see as a low-risk, stable, and liquid alternative. Further supporting the euro were announcements of historic fiscal stimulus in Germany, where the government plans to ease its debt brake and inject €500 billion into infrastructure projects.

Although eurozone growth remains fragile, particularly under the shadow of global trade barriers, the ECB is expected to continue cutting rates. Nonetheless, analysts have revised their euro forecasts upward, predicting continued strength for the single currency as eurozone and U.S. economies draw closer in performance and Europe pursues expansive fiscal measures.

Tariffs Cast a Shadow Over Eurozone Growth

So far, markets remain relatively optimistic about the eurozone economy. Activity picked up throughout 2024 following a dismal 2023, and Q1 growth exceeded expectations at +0.4%. Growth was led by Spain, Italy, and Ireland, with the latter benefiting from U.S. revenue flows and its tax haven status. Monetary easing has also helped support demand, and American pre-tariff stockpiling of European goods provided a temporary boost.

However, the outlook is clouded by ongoing tariff uncertainty. Analysts warn of a potential slowdown in H2 2025. As noted in Ebury’s February report, the question is not whether Trump-era tariffs will hurt the eurozone economy—but how badly. While the impact is unlikely to be catastrophic, the probability of a technical recession is notable, as trade disruptions are compounded by deteriorating business and consumer confidence.

April’s PMI survey showed a mixed picture: the composite index held at 50.4, indicating stagnation. Services dipped to 50.1, while manufacturing ticked up to 49.0. Despite trade concerns, optimism persists, bolstered by Germany’s incoming stimulus and falling energy prices, which benefit the eurozone both in terms of inflation and its role as a net energy importer.

ECB Rate Cuts All but Certain

April inflation data (HICP) showed slightly stronger-than-expected price pressure, with headline inflation at 2.2%—just above the ECB’s target. However, core inflation remains stubbornly high at 2.7%, and services inflation sits at 3.9%, nearly double the ECB’s goal. Despite this, the ECB appears committed to its easing path.

At its April meeting, the Governing Council cut interest rates by 25 basis points, with President Christine Lagarde indicating that the announcement of tariffs played a key role in the decision—weeks earlier, some members had favored a pause. While the ECB did not offer firm forward guidance, it notably dropped the word “restrictive” from its policy description and voiced more confidence in the disinflation process. Lagarde even hinted that rates could fall below neutral levels.

Dollar Weakness Boosts Euro Demand

Ebury analysts caution that the euro may have been slightly overbought immediately after the tariff news. Recent positive developments on the trade front have tempered EUR/USD momentum. Nonetheless, medium-term forecasts remain bullish, with analysts citing narrowing growth differentials and German fiscal stimulus as key catalysts.

Forecast Summary (EUR/USD, USD/PLN, EUR/PLN)*

*EUR/PLN forecast is based on expected performance of the Polish złoty; EUR/USD outlook is central to the USD/PLN projection.

Authors: Enrique Díaz-Alvarez, Matthew Ryan, Roman Ziruk, Michał Jóźwiak – Ebury Analysts
Source: CEO Magazyn