FX Outlook 2026: reasons for cautious optimism

Solid global growth, a resilient euro, and uncertainty around the US dollar's direction — these are some of the key themes likely to shape FX markets in 2026.

Let's start with some good news

The global economy is expected to maintain its momentum this year, supported by strong productivity, resilient consumption (particularly in emerging markets), and solid corporate earnings growth. That said, the growth gap between the eurozone and the United States is likely to persist.

In the eurozone, GDP growth should hover around 1% — roughly in line with its potential growth rate. In the US, growth is expected to exceed potential, landing between 2.5% and 3%, driven by productivity gains of around 2.5% and an unemployment rate close to 4.5%. The rapid adoption of artificial intelligence is a key factor behind this performance.

There's another, often overlooked ingredient behind the resilience of the global economy: liquidity — in other words, the amount of money in circulation. One basic economic rule applies: the more abundant liquidity is, the higher growth can be. And liquidity is set to surge this year:

• 70% of central banks worldwide have completed or are close to completing an interest-rate cutting cycle.
• The United States has paused Federal Reserve quantitative tightening, is running record deficits, and is considering $2,000 stimulus checks.
• China is posting the largest budget deficit in its history.
• Japan is preparing a $110 billion stimulus package.
• The EU plans to allocate around $1 trillion to defence spending.

This is a near-perfect recipe for stronger growth.

US dollar: don't count on a linear decline

The FX market appears confident: the consensus is that the US dollar will continue to weaken, with EUR/USD expected to reach 1.20 in Q2 2026, according to Bloomberg. Such unanimity should raise eyebrows, as it's often misleading. In our view, the widely expected linear decline of the dollar is far from guaranteed.

Why? The key lesson from 2025 is that flows and momentum play a decisive role in FX movements — often more so than macroeconomic fundamentals, trade balances, geopolitics, or interest-rate differentials.

Last year's dollar weakness wasn't driven by US protectionism, despite what's often suggested. Instead, it stemmed from heavy selling of US equities, notably by hedge funds, which tend to set market trends. After an excellent 2024 for US tech stocks, they took profits and tactically rotated — on a short-term basis — into undervalued European equities. Momentum was supportive. At the end of January/early February 2025, Germany unveiled a stimulus plan, raising hopes of a rebound in the eurozone's largest economy. At the same time, markets mistakenly anticipated a swift resolution to the conflict in Ukraine.

Where do we stand today? We're now seeing capital outflows from Europe being redirected into US equities — the opposite of what happened at the start of last year. Following the equity correction last November, valuations of US technology stocks look attractive again. If these inflows intensify, they could support a stronger dollar over the medium term.

Another factor working in favour of the greenback: the Federal Reserve's rate-cutting cycle is reducing the relative appeal of money-market yields on both sides of the Atlantic. As a result, part of the hundreds of billions currently parked in money-market funds is likely to be reallocated to equities — particularly US equities — indirectly supporting the dollar.

British pound: interest-rate differentials will make the difference

While markets continue to debate the possibility of further rate cuts by the European Central Bank, we see this as unlikely. Financing conditions in the eurozone are already highly accommodative. As was the case before Covid, the main economic challenge remains weak domestic demand. Lower rates wouldn't change that.

We therefore expect the ECB to keep its policy rate unchanged at 2% throughout the year. By contrast, the Bank of England is far from done with its easing cycle. We expect two rate cuts in the first half of the year, bringing the policy rate down to 3%. This interest-rate dynamic should favour the euro and push EUR/GBP towards 0.89 in the coming months.

Japanese yen: heading towards new lows

We don't expect any major shift in the EUR/JPY trend this year. Contrary to popular belief, a weak yen is actually a boon for Japan. It boosts revenues for exporting companies and helps explain the strong performance of the Japanese equity market over the past two years.

Even if the Bank of Japan continues its rate-hiking cycle — as we expect, with a 25-basis-point increase — we doubt this will be sufficient to support the yen. If the upward trend in EUR/JPY continues as anticipated, the pair could test unprecedented levels this year, potentially around 190 — unless Japanese authorities intervene to curb the move.

Chinese yuan: stability above all

A few weeks ago, the Central Economic Work Conference took place in Beijing. Although it received little attention, it's a key event, as it sets China's economic policy priorities for the year ahead.

There were no surprises on the monetary front: a gradual approach to rate cuts to support the property market, and above all, exchange-rate stability, as in 2023 and 2024. This should put an end to recurring — and entirely unfounded — rumours of devaluation.

Why are these fears misplaced? While China remains export-dependent, its exports now carry much higher added value. As a result, a weaker currency only marginally boosts competitiveness. Moreover, devaluation comes with difficult-to-contain side effects, notably capital outflows. China has no interest in going down that path.

Sources: WEC, iBanFirst, December 2025