According to analysts at Societe Generale, yield spreads are expected to remain the key driver of currency movements in the medium term. The bank believes that a further narrowing of the yield gap between European and US bonds creates fundamental conditions for EUR/USD to rise toward the 1.20 level in the first half of 2026. However, SocGen also warns that a renewed phase of euro weakness could emerge later in the year.
Markets are broadly aligned in their expectations that the European Central Bank will keep interest rates unchanged at 2.0% at its upcoming meeting. At the same time, skepticism is growing over the likelihood of policy easing in 2026, with some market participants increasingly discussing the possibility of a rate hike toward the end of the year.
The US Federal Reserve, meanwhile, cut its benchmark interest rate to 3.75% following its December meeting. Current market pricing points to at least two additional rate cuts over the course of next year.
Societe Generale notes that the relationship between government bond yields and EUR/USD can weaken at times, and such divergences may persist for extended periods. Nevertheless, the bank argues that the underlying correlation remains intact and is likely to reassert itself over the medium term.
Based on its outlook for bond markets, SocGen expects the euro to strengthen in the first half of 2026 before facing renewed headwinds later on.