Nordea sees EUR/USD reaching 1.25 by end-2026 as dollar rebound fades

Nordea Bank expects the euro to strengthen to $1.25 by year-end, arguing the dollar's recent rebound lacks the fundamental support to persist.

The euro traded near $1.16 Wednesday as a firm dollar and renewed caution over the euro-area outlook weighed on the single currency, though Nordea Bank said the greenback's gains will prove temporary and forecast the pair to reach 1.25 by the end of 2026.

"The current dollar rebound is not sustainable given the divergence in central bank resolve on inflation," analysts at Nordea said in a research note published Thursday. The bank's year-end target of 1.25 implies an 8% advance from current levels.

Nordea expects the European Central Bank to show greater determination than the Federal Reserve in combating inflation, with its base case projecting no rate hikes from the Fed. That divergence would push real interest rates against the dollar over time, the bank said, as the ECB maintains a tighter stance while the Fed remains on hold. High energy prices will continue to act as a brake on euro-area growth in the near term, creating risk of further short-term losses for the single currency before the medium-term reversal takes hold.

The forecast carries significant implications across asset classes. A euro at $1.25 would reduce the dollar-denominated value of US multinational earnings, pressure emerging-market currencies that borrow in dollars, and shift the relative appeal of euro-area versus US fixed-income assets. Nordea also flagged concern over the US fiscal trajectory, warning that increased bond issuance could stoke market fears about holding Treasuries — a dynamic that, while theoretically supportive for yields, could ultimately undermine the dollar if deficit concerns intensify. The bank's warning echoes a growing debate among currency strategists about whether US fiscal sustainability is becoming a structural headwind for the greenback.

Geopolitical Risks Cloud Near-Term Outlook

Geo-political developments will remain a key short-term driver, particularly if markets are underestimating the potential economic fallout, Nordea said. A decline in risk appetite and weaker equities could fuel further dollar gains in the near term, delaying the anticipated euro recovery. The bank cautioned that markets may be pricing an overly benign view of geopolitical risks, leaving the euro vulnerable to sudden shifts in sentiment.

If those risks materialize, the dollar could draw additional safe-haven support in the short run, testing the euro's resilience before the fundamental drivers Nordea cites — central bank policy divergence and US fiscal concerns — reassert themselves. This creates a two-phase outlook for the single currency: near-term downside risk followed by a medium-term recovery as the macro fundamentals reassert themselves.

Central Bank Divergence as the Core Driver

The heart of Nordea's thesis rests on the expected policy path for the two central banks. The ECB, in the bank's view, will maintain a more aggressive posture on inflation than the Fed, which Nordea expects to keep rates unchanged. This policy divergence would shift real interest rate differentials in favor of the euro, providing a sustained tailwind for the single currency through the remainder of the year.

Nordea's call positions it among the more bullish euro forecasts for 2026. A move to 1.25 would mark a significant reversal from current levels near 1.16, where the single currency has struggled as the dollar drew support from safe-haven flows and reservations about the euro-area growth trajectory. The euro's path will depend on whether the ECB follows through with a more aggressive inflation response than the Fed — a bet that runs counter to the near-term dollar momentum but aligns with the medium-term fundamental picture the bank has laid out.

This article is for informational purposes only and does not constitute investment advice.