January 2026
2026 THEMES
In this, the first edition of Foreign Exchange Outlook in 2026, as in previous years we have added an additional section – 2026 Themes. This year we are focusing on one over-arching theme – ‘Debt sustainability & fiscal policy – macro & markets impact in 2026’. This theme is then analysed across the regions from our global team in the US, Europe and Asia.
USD DEPRECIATION TO EXTEND FURTHER
After surging by 7.0% in 2024, the US dollar depreciated by 9.4% (DXY basis) in 2025 and we expect that depreciation to extend further this year. The decline of the dollar in 2025 was the largest since 2017. We are projecting a more modest decline for the dollar this year – around 5.0%, reflecting the view of further weakness in the US labour market prompting the Fed to cut a further three-to-four times this year – more than is currently priced by the market. It is also safe to assume there will be further US-policy flashpoints that will unfold this year – some anticipated (Fed Chair pick; Supreme Court ruling-triggered trade policy uncertainties) and some unanticipated (we have already had one with the attack on Venezuela; although market implications have been negligible so far). While we may see some renewed trade policy uncertainties we doubt it will reach 2025 levels and hence the global backdrop relative to the US should also prove more supportive for US dollar weakness. Fiscal policy support in the US, Europe, Japan and China along with the lagged impact of monetary easing will prove supportive for global growth.
EUR TO BREAK ABOVE 1.2000
The 1.2000-level has proved important for EUR/USD historically. The pre-negative rate period saw EUR/USD generally trading above that level while the negative rate period through to the global inflation shock saw EUR/USD below this level. Foreign investors have returned to European bond and equity markets and ECB policy stability with inflation at target will likely see this capital inflow continue (especially if peace in Ukraine is achieved) and will be a key support for EUR/USD.
JPY TO STRENGTHEN AS BOJ DOES MORE
The unfavourable policy mix (loose monetary policy and expansionary fiscal policy) continues to keep yields in Japan excessively low in real terms. We assume the BoJ will do more to address this and added to Fed cuts should see USD/JPY decline.
CNY APPRECIATION BIAS
Potential more proactive fiscal policy and a continued rebalancing for a better growth model and growth in 2026 likely provide some tailwinds for CNY. The extent of appreciation, however, is likely limited. We anticipate persistent, though less severe, deflation throughout 2026, with the GDP deflator not expected to turn positive until 2027. Risks to the currency outlook depend heavily on the level of policy support, broader U.S. dollar performance, and external market conditions.
