Morgan Stanley has set a 2Q26 target of 1.23 for the EUR/USD exchange rate, saying the euro is moving toward a long-standing upside goal as a number of unconventional forces continue to undermine the dollar.
In a note published on Friday, the bank's strategists highlighted that "EUR/USD has rallied year to date as unconventional catalysts have driven USD risk premia to the wides last seen in 2Q25." They reiterated their specific forecast that "Our 2Q26 EUR/USD target is 1.23 and, while there are upside risks to this cross, we are not moving to our bull case yet," and cautioned that medium-term risks surrounding the dollar remain elevated even though short-term volatility could return if economic data regain influence.
"EUR/USD has rallied year to date as unconventional catalysts have driven USD risk premia to the wides last seen in 2Q25," the strategists said.
The bank emphasized that the latest phase of dollar weakness cannot be explained by interest-rate differentials, which have historically been the main driver of G10 currency moves. Instead, they said, "we can see that the catalysts for USD weakness so far this year have been unconventional," adding that predicting these catalysts "is very challenging," and that such developments "continue to occupy investor attention."
Morgan Stanley's strategists noted that a stronger euro has mixed effects across markets. On one hand, it enhances returns on European assets when measured in a constant-currency basis. On the other hand, it creates a meaningful drag on local corporate earnings through translation effects because many European companies generate substantial revenue outside the region.
The bank quantifies this earnings impact: for every 5% rise in EUR/USD, MSCI Europe annual earnings growth is estimated to be reduced by roughly 1.5 to 2 percentage points, largely due to those translational effects tied to overseas revenue exposure.
From a macroeconomic perspective, Morgan Stanley's economists calculated that a 5% appreciation in the euro on a trade-weighted basis would lower euro-area exports by about 1.5% and trim overall economic growth by around 0.3 percentage points. They also outlined inflationary implications, noting that changes tied to energy prices act faster: a 10% rise in EUR/USD is expected to reduce euro-area inflation by roughly 30 basis points over the next two years.
The note frames these outcomes as trade-offs: currency strength supports measured asset returns in constant-currency terms while imposing tangible costs on reported earnings, export competitiveness, growth, and near-term inflation dynamics.
Analysts and market participants will be watching whether the unconventional drivers of dollar weakness persist, and whether incoming economic data shifts short-term volatility back into focus. For now, Morgan Stanley remains cautious about moving into a full bull case on the euro despite the 1.23 target for the second quarter of 2026.