Euro forecast to reach $1.20 by 2027 on rate spreads

MUFG forecast the euro will recover against the dollar and reach 1.20 by the first quarter of 2027, arguing that rate differentials are again taking control of EUR/USD after the oil-driven inflation scare eased. EUR/USD fell to 1.1422 in June from 1.1683, its longest period below 1.15 since June last year.

The call rests on a narrowing gap between US and euro-area rate expectations. The ECB raised its deposit rate by 25 basis points to 2.25% in June, its first increase since September 2023, while market pricing for further ECB tightening dropped from close to three hikes before the meeting to roughly one now.

Rate spreads retake EUR/USD role

MUFG expects EUR/USD to rise to 1.1600 in the third quarter of 2026, 1.1800 by the fourth quarter and 1.2000 in the first quarter of 2027. The bank said pricing for another Fed increase now looks less convincing than pricing for one final ECB insurance hike.

Energy is the swing factor behind that shift. Brent crude has largely unwound its US-Iran conflict surge, reducing inflation pass-through pressure and helping the 10-year German bund yield fall 8 basis points in June to 2.86%.

If oil stays contained and Fed tightening bets keep fading, the dollar would lose support from yield spreads, EUR/USD could grind higher and European exporters would face a tougher currency backdrop. If energy prices rise again, ECB pricing could harden, bund yields could reprice higher and the euro’s advance would depend on whether inflation risk hurts growth more than it lifts rates. By December 31, 2026, the key test will be whether EUR/USD is near MUFG’s 1.1800 year-end marker.