BNP Paribas strategists anticipate that the US economy will grow above its potential pace in 2026, projecting an average annual GDP growth rate of 2.9%, which marks an improvement from 2.1% in 2025 [1]. Inflation is expected to overshoot the Federal Reserve's target, reaching 3.0% in 2026 and continuing at elevated levels until at least the end of 2027. This persistent inflation is attributed to factors such as tariffs and rising oil prices, although the impact of tariffs appears less significant than previously expected [1].
In response to these economic conditions, the Federal Open Market Committee (FOMC) implemented three rate cuts in 2025, totaling a cumulative reduction of 75 basis points. BNP Paribas expects the Fed Funds target range to remain steady at 3.5% to 3.75% throughout 2026 [1]. The strategists note that the rebalancing of risks related to the Fed's dual mandate, with a particular emphasis on the employment component, has triggered this new cycle of rate cuts [1].
Against this backdrop, BNP Paribas forecasts that the US dollar will continue to depreciate against the euro. This outlook is based on the combination of above-potential growth, persistent inflation, and a steady Fed Funds rate, which collectively contribute to a softer dollar environment [1].
No specific market reactions or analyst opinions regarding immediate market impact are mentioned in the article. However, the forward-looking statements from BNP Paribas suggest a gradual decline in the dollar as these macroeconomic trends unfold [1].
CONCLUSION
BNP Paribas projects a gradual depreciation of the US dollar against the euro, driven by above-potential US growth, persistent inflation, and a steady Fed Funds rate. The outlook is shaped by recent Fed rate cuts and ongoing inflationary pressures. Market participants should monitor these macroeconomic trends for potential currency movements.