Investec cuts EUR/USD forecast to 1.17 as resilient US economy boosts dollar

The euro slipped to $1.1380 in June after sustained pressure from stronger-than-expected US economic data, prompting Investec to lower its EUR/USD forecast to 1.17 by the end of 2026 and 1.19 by the end of 2027.

"We have tempered our call for USD weakness over the next 18 months," the Investec research team said in a note published Thursday. The bank cited a US economy that has proved more resilient than anticipated, with the labor market stabilizing and capital spending holding up despite elevated interest rates.

Investec upgraded its US GDP forecasts to 2.2% for 2026 and 2.1% for 2027, pointing to sustained economic momentum and continued investment tied to artificial intelligence infrastructure. The bank now expects the Federal Reserve to deliver just two quarter-point rate cuts during 2027, a significant pullback from its earlier, more aggressive easing cycle projections that had included multiple cuts in 2026.

The revised outlook implies limited upside for the euro over the medium term. Lower gasoline prices should support US consumer spending in the second half of the year, Investec said, offsetting the fading boost from earlier tax rebates and keeping the dollar supported. The bank's forecast of EUR/USD at 1.17 by end-2026 represents a roughly 2.8% gain from current levels — a modest recovery that reinforces the strong-dollar narrative rather than signaling a sustained euro rebound.

Fed Policy Path Reshapes Dollar Outlook

The repricing of Federal Reserve rate expectations has been the primary driver of dollar strength in recent weeks. While Investec still expects the greenback to weaken over the longer term, the combination of stronger US growth and a slower pace of monetary easing will constrain EUR/USD gains compared with what the bank previously projected.

The euro's decline below $1.14 marks a notable shift from earlier in the year, when markets were pricing a more aggressive Fed easing cycle that would have narrowed rate differentials between the US and the euro area. Those expectations have since been pared back as data on employment, consumer spending and services activity consistently surprised to the upside. The Atlanta Fed's GDPNow tracker has been pointing to above-trend growth, reinforcing the view that the US economy does not need immediate monetary stimulus.

For the European Central Bank, the stronger dollar presents a mixed picture. A weaker euro boosts export competitiveness for euro-area manufacturers but also raises the cost of imported goods, including energy priced in dollars, potentially adding to inflation pressures that the ECB is still working to contain. The divergence in monetary policy expectations — with the Fed holding steady while the ECB continues its own easing cycle — has widened the rate differential in favor of the dollar, adding to the euro's headwinds. The last time the rate differential between US and German two-year yields widened to current levels, EUR/USD traded below $1.12, suggesting further downside risk if the gap persists.

Cross-Asset Implications of a Sustained Dollar Rally

The implications of a sustained dollar rally extend well beyond the currency market. A stronger greenback typically pressures commodities priced in dollars, including gold and oil, as it makes them more expensive for holders of other currencies. It can also weigh on emerging-market equities by tightening financial conditions in dollar-dependent economies and reduce the translated earnings of US multinational corporations that generate a significant portion of revenue overseas.

Investec's revised forecasts align with a broader shift among sell-side strategists who have been scaling back their bearish dollar calls. The bank's view that the US economy will outperform its peers — supported by AI-related investment, resilient consumption and a stable labor market — provides the fundamental backdrop for a dollar that remains bid even as the Fed eventually moves toward easing.

The next major catalyst for EUR/USD will be the Fed's July meeting, where updated economic projections and the dot plot will offer fresh insight into the pace of any future rate cuts. For now, Investec's message is clear: the dollar's strength has more room to run than previously expected, and the euro's path higher will be slower and more limited than many had anticipated. If the US economy continues to surprise to the upside, further forecast downgrades for EUR/USD could follow.

This article is for informational purposes only and does not constitute investment advice.