EUR/USD year-ahead forecast: Median, range and upside/downside risks based on projections from 20+ investment banks and FX analysts.View forecasts
The euro held steady against the Pound but weakened against the US dollar as German inflation jumped sharply, reinforcing expectations of a more hawkish ECB.
German Inflation Jumps on Higher Energy Costs
The EU is faced with a challenging situation as rate hikes could be carried out when the underlying inflationary trends don’t need them.
After Monday’s German CPI figures showed a large jump due to higher energy costs, markets were prepared for more hot figures out of the EU on Tuesday.
Annual inflation in the Eurozone jumped to 2.5% in March 2026, up from 1.9% in February, marking the highest rate since early 2025.
This preliminary flash estimate revealed a sharp reversal in the bloc’s recent disinflationary trend due to the surge in energy costs, which rose 4.9% year-on-year following a 3.1% contraction just a month prior.
This shift is directly linked to the conflict in the Middle East and the closure of the Strait of Hormuz, which nearly doubled global oil prices and disrupted liquefied natural gas supplies.
Individual country data highlights significant dispersion across the 21-nation currency bloc.
Germany saw its harmonized inflation rate climb to 2.8%, while Spain experienced a sharper acceleration to 3.3%, driven by higher fuel prices.
Ireland, Greece, and the Netherlands all saw annual price growth top 2.6%.
Croatia recorded the largest increase in the region, with inflation approaching 5%.
In contrast, Italy remained an outlier among the major economies, with its rate holding steady at a relatively low 1.5%.
France also remained below the Eurozone average at 1.9%, as its extensive nuclear energy sector partially insulated consumers from the full impact of surging wholesale gas prices.
While energy acted as the dominant headline driver, other components provided a cooling counterweight.
Core inflation, which excludes volatile energy and food prices, unexpectedly slowed to 2.3% from 2.4%.
Services inflation also eased to 3.2% from 3.4% in February, suggesting that domestic demand-led price pressures are actually softening.
Food, alcohol, and tobacco inflation dipped slightly to 2.4% as well. This “complex split” indicates that the current inflationary impulse is largely external rather than a result of domestic economic overheating.
The implications for the European Central Bank (ECB) are significant, creating a difficult policy dilemma.
With headline inflation now back above the 2% target, “hawks” on the Governing Council are increasingly pushing for interest rate hikes to prevent energy shocks from becoming entrenched.
Financial markets have reacted by pricing in multiple hikes for 2026, with the first potentially occurring as early as April or June.
However, “doves” remain cautious, noting that the cooling core rate and slowing services inflation suggest the broader economy is fragile. The ECB has already revised its full-year inflation projection upward to 2.6% for 2026, warning that a “severe scenario” involving further infrastructure damage could push rates as high as 4.8% next year.
EUR/USD year-ahead forecast: Median, range and upside/downside risks based on projections from 20+ investment banks and FX analysts.View forecasts
Beyond monetary policy, the data underscores a growing risk of “stagflation” for the European economy.
While high energy prices are pushing up producer costs, they are simultaneously eroding consumer purchasing power and denting business confidence.
The ECB recently revised its 2026 growth forecast downward to 0.9%, reflecting the dual hit from increased uncertainty and higher input costs.
This environment leaves the central bank walking a tightrope between fighting a war-driven energy shock and avoiding a “double-dip” recession as domestic demand flags.
The euro was unaffected by the data and stayed unchanged against the pound between 0.865 and 0.87.
Both EURUSD and GBPUSD were higher by around 0.6% as the USD poked to a new 2026 and reversed sharply.
