The euro had a good run through the summer of 2026 and then gave most of it back. Against the US dollar, the euro climbed from 1.1394 on 30 June to a high of 1.1711 in late August, a gain of more than 2.7%. By early October it was back to roughly 1.1335. The ECB’s own published projections explain a good deal of why.
Chart: ECB euro reference rates, 30 June to early October 2026. Chart by Investory Spot.
The arithmetic of two hiking central banks
For most of 2026 the euro benefited from a simple story: the Fed was expected to cut while the ECB held. That trade does not work any more. The Federal Reserve raised its target range by 25 basis points to 3.75%-4.00% on 16 September, its first increase since 2023, and the dot plot showed 16 of 18 participants expecting at least one more increase. The ECB hiked on 10 September.
When both sides of a pair are tightening, the rate differential stops doing the work. What is left is the relative pace of tightening, the growth differential and risk sentiment. With euro area growth revised down to 0.9% for 2026 and US growth described in the FOMC statement as “expanding at a solid pace”, the growth leg of the equation is not helping the euro either.
Reading the reference rates properly
The ECB publishes official reference rates every working day, and they are the cleanest non-controversial series for tracking this pair. The recent sequence is instructive:
- 30 June 2026: 1.1394.
- 15 July 2026: 1.1520.
- 31 July 2026: 1.1610.
- 15 August 2026: 1.1700.
- 31 August 2026: 1.1711, the period high.
- 1 September 2026: 1.1590.
- 25 September 2026: 1.1396.
- Early October 2026: approximately 1.1335.
The euro gave back the entire summer move in roughly five weeks. That is not a pattern of a currency being sold on economic weakness so much as one being bought on an expectation that has since been withdrawn.
What the projections commit the ECB to
A high bar for easing
With inflation projected at 3.0% for 2026 and 2.5% for 2027, and the ECB having just raised rates, there is no room in the near term for a dovish turn. Any expectation of cuts priced before September has been squeezed out.
An asymmetric risk
The projection shows inflation converging to 2.1% in 2028 partly on the assumption that the energy shock unwinds. If Middle East energy prices stay elevated, both the inflation path and the growth path move adversely at once, and the ECB would face the same stagflation trade-off it is already managing. In that scenario the euro tends to lose on rate-support despite higher rates, because markets discount the growth damage faster than they re-price the carry.
A wider forecast band than the point estimates suggest
The 0.9% growth figure for 2026 is the number to watch. If quarterly data come in above it, the ECB has room to hold rather than cut and the pair gets support from the rate differential widening in the euro’s favour. If they come in below, the market starts pricing cuts again and the current level is hard to defend.
The practical conclusion is that the ECB’s projections remove the case for euro downside based on expected easing, and replace it with a case based on growth disappointment. Those are different trades with different timing, and conflating them is how positions get caught out around policy meetings.