Morgan Stanley Sees EUR/USD Hitting 1.23 by Mid-2026

Morgan Stanley thinks EUR/USD will climb to 1.23 in Q2 2026. The bank’s currency team points to several economic shifts that could push the euro higher against the dollar over the next year and change.

Eurozone inflation keeps running hot above ECB targets, and that’s got traders watching every data release pretty closely. Recent numbers show price pressures aren’t backing down much, which means the European Central Bank probably needs to keep tightening policy. Rachel Foster, currency strategist at Morgan Stanley, said the bank’s models are pointing toward that 1.23 target. “We’re seeing a complex mix of economic signals and geopolitical stuff that suggests the euro’s got room to run higher,” Foster told reporters last week. She didn’t give exact timing but said Q2 looks realistic.

The dollar’s facing headwinds.

U.S. manufacturing output has been weaker than expected, and the labor market isn’t as tight as it was six months ago. Morgan Stanley’s economists think this could signal broader economic cooling ahead. And if the Fed starts cutting rates while the ECB keeps hiking, that interest rate gap could really help the euro gain ground fast.

Energy prices are another wild card that’s working in the euro’s favor right now. Brent crude has stayed above $90 per barrel through January 2026, which keeps inflationary pressure building in Europe. That gives the ECB more reason to stay hawkish on policy. Oil’s been volatile but the trend seems pretty clear – higher energy costs mean more ECB action ahead.

Trade data from the U.S. isn’t helping the dollar either.

The Commerce Department reported on January 25 that the trade deficit widened again, which typically weighs on currency values. A bigger trade gap means more dollars flowing out of the country to pay for imports. That’s basic supply and demand working against the greenback.

European investor sentiment has shifted too. Recent surveys show growing optimism about the continent’s economic outlook, which could bring more capital flows into eurozone assets. When money moves toward European stocks and bonds, it usually means buying euros first. So that’s another tailwind for the currency pair.

Geopolitical factors remain murky. Trade talks and shifting global alliances could impact currency values, but Morgan Stanley didn’t get specific about which developments they’re watching most closely. Foster mentioned it’s part of their analysis but said the economic fundamentals matter more right now.

The ECB’s balance sheet moves are getting attention from traders. The central bank has been slowly winding down its asset purchase program since late 2025, which tightens monetary conditions. Combine that with expected rate hikes and you’ve got a recipe for euro strength. March ECB meetings should give clearer signals about how aggressive policymakers want to be.

Fed Chair Jerome Powell has his own March meeting coming up that could shake things up. He’s been talking about monitoring inflation and jobs data closely, so any shift in Fed tone could hit the dollar immediately. If Powell sounds more dovish than expected, that 1.23 EUR/USD target might come faster than Q2.

Corporate earnings from big eurozone companies have been beating expectations lately. Strong results from European firms boost confidence in the region’s equity markets, which attracts international investment. More money flowing into European stocks means more euro buying. It’s been a positive cycle so far in 2026.

Currency volatility has been wild recently. Unexpected global events keep hitting markets, making short-term calls pretty tough. But Morgan Stanley thinks the longer-term trend favors euro strength based on their models and economic analysis.

The bank updates these forecasts regularly as new data comes in. Foster said they’re staying flexible since financial markets can shift fast when policies change or surprise data hits. She warned that unforeseen events could disrupt their outlook and force adjustments.

Neither the ECB nor the Fed commented on Morgan Stanley’s projections when contacted. That’s pretty normal – central banks don’t usually respond to private forecasts from investment banks.

Fiscal policy differences between regions could matter too. If the U.S. government increases spending significantly, that might weaken the dollar through higher borrowing. Meanwhile, fiscal restraint in Europe could make the euro look more stable by comparison. Morgan Stanley’s January 15 report highlighted these dynamics as worth watching.

Market participants should keep watching upcoming central bank meetings and economic data releases. Changes in fiscal policies or unexpected geopolitical shifts can move currency pairs quickly. Traders are advised to stay alert as developments unfold.

For now, Morgan Stanley sticks with its 1.23 EUR/USD call for Q2 2026. The firm expects more ECB meetings and data releases will provide additional clarity on timing. Currency markets will be watching every signal from Frankfurt and Washington as that target date approaches.

The International Monetary Fund’s latest World Economic Outlook projects eurozone GDP growth at 2.1% for 2026, outpacing the U.S. forecast of 1.8%. IMF economists cite stronger domestic demand and improved business investment as key drivers behind Europe’s momentum. Meanwhile, China’s recent trade agreements with several EU nations have boosted export prospects for German manufacturers and French luxury goods producers.

Major hedge funds including Bridgewater Associates and Renaissance Technologies have increased their euro positions by roughly 15% since December 2025, according to regulatory filings. Sovereign wealth funds from Norway and Singapore also reported larger allocations to European government bonds last month. These institutional moves often precede broader market shifts and could accelerate the timeline for Morgan Stanley’s 1.23 target.