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Investing.com - Morgan Stanley predicts the EUR/USD will continue its uptrend to reach 1.23 by spring 2026 before declining to 1.16 by the end of next year, according to a new forecast released by the investment bank.
The financial institution attributes the euro’s near-term strength primarily to weakness in the U.S. dollar rather than inherent euro strength. This currency pair movement reflects broader macroeconomic divergences between the United States and Europe.
Morgan Stanley notes that a rebound in U.S. economic growth and the anticipated end of the Federal Reserve’s rate-cutting cycle will increasingly contrast with the European Central Bank’s monetary policy direction. The ECB is expected to cut rates into accommodative territory, reinforcing investors’ perception of Europe’s relatively weaker return profile.
The investment bank highlights that falling local interest rates amid economic weakness in Europe will likely increase the euro’s popularity as a funding currency. This dynamic typically occurs when investors borrow in a low-yielding currency to invest in higher-yielding assets elsewhere.
The forecast suggests a two-phase movement for the currency pair in 2026, with initial dollar weakness giving way to relative dollar strength as the divergent economic trajectories between the U.S. and Europe become more pronounced in the latter part of the year.
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