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Will EUR/USD trade above 1.25 at any point by December 31, 2026?
The Condition
Fed cuts rates by at least 50bp total by September 2026 FOMC (to ≤3.25%)
Our Ensemble Estimates
Given Fed cuts ≥50bp by Sep: Will EUR/USD trade above 1.25 at any point by December 31, 2026?
Given Fed disappoints on cuts: Will EUR/USD trade above 1.25 at any point by December 31, 2026?
Causal Effect
Fed rate cuts worth ~30pp to EUR/USD reaching 1.25 threshold — the single largest causal effect in the set, driven by rate differential compression and carry trade reversal
Why This Matters
Tests whether further Fed rate cuts (narrowing the 164bp Fed-ECB differential) push EUR/USD beyond the 1.25 level. The analysis identifies the currency channel as the sole functional transmission mechanism for Fed-ECB divergence, with EUR/USD already up 12.7% YoY to 1.19. Fed delivery of ≥50bp would compress the rate differential to ~114bp or less, reinforcing the EUR appreciation trend. Fund managers are at their lowest USD exposure since 2006, amplifying directional momentum. However, the self-limiting feedback loop (EUR strength suppresses eurozone inflation, potentially forcing ECB cuts) may cap the appreciation.
Resolution Criteria
ECB reference rate for EUR/USD (published daily) shows a fixing at or above 1.2500 on any business day between February 22, 2026 and December 31, 2026
Source Analysis
EUR/USD sustaining above 1.20 would force ECB inflation forecast downgrades, increasing probability of ECB defensive cut