Morgan Stanley Sees EUR/USD at 1.23 in Q2 2026

Morgan Stanley analysts project the EUR/USD forecast 2026 to reach 1.23 in the second quarter as atypical factors continue to pressure the US dollar. According to a Friday note, the euro has rallied year-to-date, driven by unconventional catalysts that pushed USD risk premia to the widest levels since 2Q25.

Unconventional Factors Weigh on the Dollar

The bank notes that the recent dollar weakness is not explained by traditional interest rate differentials, which usually influence G10 currencies. Instead, unconventional developments are dominating market movements, making the dollar harder to predict. While short-term volatility may return if economic data gain influence, medium-term risks surrounding the greenback remain elevated.

Implications for Europe’s Economy and Earnings

A stronger euro benefits European assets in constant currency terms but creates a drag on local earnings. Morgan Stanley estimates that every 5% rise in the EUR/USD forecast 2026 reduces MSCI Europe’s annual earnings growth by 1.5–2 percentage points. Economically, a 5% euro appreciation on a trade-weighted basis could lower euro area exports by 1.5% and trim GDP growth by 0.3 points. Inflation effects are also notable, with a 10% rise in EUR/USD expected to reduce euro area inflation by approximately 30 basis points over the next two years.