In my view, there is only one expectation for the European Central Bank in 2026—tightening. In the most optimistic scenario for the dollar, inflation in the European Union will remain steady around 2%, so there will be no need for monetary policy intervention. Rates will stay at current levels, which will not provide additional support for the European currency. However, the euro continues to dominate the dollar and shows no signs of losing its advantage. The market has not found compelling reasons to begin constructing a downward trend in the last six months, and I really don't think reasons will emerge in 2026.

In the worst-case scenario for the dollar, inflation in the EU could start to accelerate. It wouldn't take much for this to happen. Donald Trump might consider that Europe is again disrespecting the U.S., profiting off it, becoming rich, and taking advantage of the United States. Furthermore, the EU "does not want the war in Ukraine to end" and might impose new sanctions against Russia. These reasons might be sufficient to spark a new escalation of the trade war. Tariffs could rise, along with inflation.

The ECB could also support inflation if it begins printing billions of euros to stimulate an economy that has been stagnant for several years. The ECB might lower rates a few more times to enhance economic stimulus, but in that case, inflation could slow down below 2%. Consequently, it may resort to other methods that will have consequences. However, at present, nothing suggests that the consumer price index will rise in 2026. Therefore, there is no reason to increase interest rates. But while there are no reasons to raise rates in the EU, there are reasons to continue lowering them in the U.S.

In my opinion, the ECB and Fed rates will continue to converge, which is extremely unfavorable for the U.S. dollar. The year 2025 has been very challenging for the dollar, but who said that 2026 will be easier if Trump remains the President of the United States?

Wave Analysis for EUR/USD:

Based on the analysis of EUR/USD, I conclude that the pair continues to build an upward trend segment. Trump's policies and the Fed's monetary policy remain significant factors contributing to the long-term decline of the U.S. dollar. The targets for the current trend segment may reach the 25 figure. The current upward wave structure is beginning to develop, and I hope we are witnessing the construction of an impulsive wave set that is part of the global wave 5. In this case, we should expect growth to reach precisely the 25 figure, as I mentioned earlier.

Wave Analysis for GBP/USD:

The wave structure of the GBP/USD pair has changed. We continue to deal with an upward, impulsive segment of the trend, but its internal wave structure has become more complex. The downward corrective structure a-b-c-d-e in C of 4 appears complete, as does the entire wave 4. If this is indeed the case, I expect the main trend segment to resume its progression with initial targets around the 38 and 40 figures.

In the short term, I anticipated the construction of wave 3 or c with targets located around 1.3280 and 1.3360, corresponding to 76.4% and 61.8% Fibonacci retracements. These targets have been reached. Wave 3 or c continues its development, and the current wave set is beginning to take on an impulsive character. Therefore, we can expect a further increase in quotes with targets around 1.3580 and 1.3630.

Key Principles of My Analysis:

1. Wave structures should be simple and understandable. Complex structures are difficult to trade and often change.
2. If there is no confidence in what is happening in the market, it is better not to enter it.
3. There can never be 100% certainty about the direction of movement. Don't forget about protective Stop Loss orders.
4. Wave analysis can be combined with other types of analysis and trading strategies.