Morgan Stanley
2026 FX Outlook: The Year of Pivots
Macro Scenarios
Morgan Stanley EUR/USD scenario analysis and USD macro framework
EUR/USD Fair Value by Scenario
Base case highlighted in red
Rate Spread Sensitivity
Fed-ECB spread vs EUR/USD fair value
Fed vs ECB Rate Assumptions
Central bank rate assumptions across scenarios
Most bearish EUR/USD outcome. ECB delivers additional cuts while Fed stays on hold. Growth divergence widens.
Both central banks ease but eurozone growth disappoints. EUR/USD range-bound.
Base case for H1. Fed cuts aggressively while German fiscal stimulus lifts eurozone. EUR/USD peaks at 1.23.
US recession drives Fed to cut to 2%. EUR benefits initially but gains limited by global risk aversion.
H2 scenario. US growth re-accelerates, Fed signals pause. EUR/USD reverses gains. Base case for Q4.
USD Macro Scenario Matrix
Growth x Inflation framework for the dollar
USD spikes on risk-off but weakens as Fed cuts aggressively. JPY and CHF outperform. EM carry devastated. GBP vulnerable given UK fiscal constraints.
US exceptionalism dies. Fed constrained by inflation. EUR/USD range-bound. Gold and CHF benefit. EM currencies face worst outcome.
Our central scenario. Fed cuts support global risk appetite. USD weakens 5-6% on DXY. GBP, AUD, and Scandis outperform. JPY rallies on BoJ normalization. EM carry performs well.
Fed easing slowed by sticky inflation. USD weakens less than soft landing scenario. EUR/USD range 1.15-1.20. GBP still outperforms on UK specifics. JPY gains limited.
US growth surprises to upside without inflation. Fed pauses. USD supported but high-beta FX also benefits from global risk-on. V-shape DXY scenario.
Strong US growth with persistent inflation. Fed on hold or hikes. Highly USD supportive. JPY weakens. EM under pressure. Only GBP can keep pace given UK carry advantage.