EUR/USD has traded a tight 1.05–1.10 range for most of 2026 after a brief flirtation with 1.12 in late 2024. The fundamentals supporting that range are weaker now than three months ago. A move toward parity would not require any single dramatic event.
Rate-differential, mechanically
The 2-year US Treasury yield minus the 2-year Schatz yield is the cleanest single proxy for EUR/USD over 6–12 month windows. The spread widened through 2024 as the Fed held while the ECB cut, narrowed in mid-2025, and is widening again in 2026 because European growth disappointed while US growth held up. Each 25bp of additional widening tends to translate, with a lag, into roughly 1.5–2.5 big-figures of EUR/USD downside.
Three things that would accelerate the move
- French political fragmentation — a renewed minority-government cycle re-prices peripheral spreads and feeds back into EUR/USD via risk premium.
- Trump-administration tariff escalation specifically aimed at EU autos or steel — direct hit to the euro-area current-account surplus.
- ECB cutting faster than the market expects — would invert the implied terminal rate path.
What would defend the range
A US growth surprise lower (would force Fed cuts and narrow the spread), a Middle East shock that drove energy prices high enough to revisit 2022's eurozone external-deficit pain (would flip the dynamic — energy spike hurts EUR more than USD, but the resulting global growth scare hurts USD more), or simply a return of EM-driven dollar weakness.