Forex market outlook for 2026

USD 

2025 overview: a year of volatility

At the start of this year, the United States Dollar Index (DXY) spiked above 110 in January as part of the ‘Trump trade’. This referred to market strategies and asset allocation shifts that gained traction immediately following Donald Trump’s victory in the November 2024 United States (US) presidential election, carrying into early 2025 as his second term began.

Investor expectations centred on protectionism, fiscal expansion, deregulation and pro-business reforms – amplified by campaign promises for bold action in a Republican-controlled Congress. This created a bullish tilt toward assets perceived to benefit from higher growth and inflation, while pressuring those vulnerable to trade disruptions.

By March, this approach had begun to unravel as haphazard and overly aggressive tariff policies sparked recession and trade war fears. In addition, concerns grew over diminished central bank independence as Federal Reserve (Fed) faced political pressure to cut interest rates despite persistent inflation.

As economic growth and inflation moderated and the labour market cooled, Fed reduced rates three times by 25 basis points (bp) in September, October and December, bringing Fed funds rate to 3.50% - 3.75%. These cuts followed 100 bp of easing in 2024, materially reducing the US dollar's (USD) yield advantage.

The USD’s performance in 2025 has been characterised by substantial volatility. The DXY trended lower through the year, down 9.1% year to date (YTD), though occasional safe-haven demand provided support during market uncertainty.

2026 outlook

• USD to face headwinds

The DXY is expected to face considerable headwinds in 2026 as central bank policy divergence intensifies. We believe the DXY has potential to move towards the mid-90s range by the end of 2026.

• Fed and central banks

The Fed is anticipated to implement one to two rate cuts toward a neutral stance around 3.00% – 3.25%, while other central banks pursue different trajectories. The Bank of Japan's (BoJ) gradual normalisation narrows the yield differential that has long supported USD strength against the  Japanese yen. Meanwhile, the European Central Bank's (ECB) extended pause at 2.00% creates favourable conditions for modest euro appreciation as the Fed eases.

Uncertainty surrounding changes in Fed leadership adds another layer of negative sentiment toward the dollar as Jerome Powell’s term as chair ends in May.

• Inflation

However, dollar weakness remains contingent on inflation subsiding sufficiently to allow the anticipated easing. Should price pressures prove persistent, compelling the Fed to maintain restrictive policy longer than expected, DXY could find support near current levels.

AUD/USD

2025 performance overview

As we approach the end of 2025, AUD/USD is trading at 0.6640 – a 7.31% increase calendar year-to-date (CYTD) – and is set to break a four-year losing streak. Its impressive performance comes as USD, as measured by DXY, declined by 9.06% during the same timeframe.

The Australian dollar's (AUD) ascent and the greenback’s decline can be attributed to several key factors. Firm commodity prices have played a role, notably the strong performance of iron ore, copper and gold, which has supported the commodity-dependent currency and Australian economy.

More importantly, however, Reserve Bank of Australia’s (RBA) 75 bp of rate cuts from a peak of 4.35% to 3.60% this year was shallower than market anticipated. This was primarily due to rising inflation, resilient economic growth, employment and spending data.

Finally, the dramatic improvement in risk sentiment that followed Liberation Day tariff lows in early April allowed AUD/USD, which is an integral part of the risk complex, to make a V-shaped recovery from its 9 April low of 0.5912.

2026 outlook 

Looking ahead to 2026, AUD/USD is expected to continue reflecting interplay between a potentially weaker US dollar and stable Australian economic performance.

A bearish dollar bias is expected to prevail in first half (H1) of 2026, primarily influenced by Fed ongoing concerns regarding labour market softness and potential for further monetary easing.

Against this backdrop, AUD is expected to receive support from a number of factors, including:

• Continued commodity support

Australian economy’s strong reliance on commodity exports positions it well to benefit from sustained global demand for key resources such as iron ore, coal and agricultural goods. Furthermore, new narratives surrounding copper, rare earths and gold provide valuable diversification for Australia’s commodity sector and support for AUD.

• Pro-cyclical growth environment

Upgraded global gross domestic product (GDP) forecasts and a broader push for economic growth should enhance overall risk sentiment. This environment typically makes higher-yielding currencies, such as AUD, more attractive relative to USD.

• Supportive interest rate differentials

As monetary policies evolve in Australia and US, interest rate differentials between two countries are expected to shift in favour of AUD. This is best illustrated by rates market pricing in Fed Funds rate falling another 50 bp into a range of 3.00 - 3.25% by end of 2026, while rates market sees RBA’s official cash rate ending 2026 just above 4.00%.

• Foreign exchange hedge ratios

Australian superannuation funds have begun lifting their foreign exchange (FX) hedge ratios, effectively reducing a perennial structural headwind for AUD.

In conclusion, while risks remain – including potential geopolitical tensions and unexpected shifts in monetary policy – prevailing conditions favour a continued recovery for AUD towards 0.6940 - 0.6950 by mid-2026.

Technical analysis

As can be viewed on weekly chart below, AUD/USD has recently broken above multi-month downtrend resistance originating from February 2021 high of 0.8007, which corresponds to 0.6600 level.

It is currently tackling its next upside challenge – 200-week moving average (MA) at 0.6643. A weekly close above here would allow pair to retest 0.6706 high from mid-September, then follow 0.6940 - 0.6950 level from September 2024.

AUD/USD weekly candlestick chart

Drilling down into daily chart, after reaching a high of 0.6617 at end of October, AUD/USD fell to a three-month low of 0.6419 on 21 November. That low was in vicinity of 0.6420 support zone, which has repeatedly held as a floor in AUD/USD since early August.

From that point, AUD/USD has mounted an impressive rally, gaining over 4% in just under three weeks. In the process, it has reclaimed 200-day MA at 0.6473 and, more recently, broke above a cluster of horizontal resistance at 0.6620 - 0.6630, which had capped AUD/USD since mid-September.

As mentioned above, if AUD/USD can close week above 200-week MA at 0.6643, it would allow AUD/USD to retest 0.6706 high from mid-September.

Above 0.6706 is daily trend channel resistance around 0.6740 - 0.6750. Beyond that comes resistance at 0.6870 from December 2023 high, before 0.6940 - 0.6950 resistance level coming from September 2024 high.

AUD/USD daily candlestick chart

USD/JPY

2025 performance overview

The yen experienced dramatic swings in 2025, initially appreciating 12% against USD in the first four months before surrendering those gains in the second half. Year to date (YTD), USD/JPY was little changed at -1.0%.

The BoJ maintained extreme caution throughout most of the year, keeping rates on hold as officials awaited additional evidence of sustainable domestic demand and wage growth. US reciprocal tariffs introduced complications, creating additional uncertainty regarding Japanese economy.

In September, USD/JPY’s sharp reversal coincided with Prime Minister Takaichi’s election and her ambitious fiscal stimulus plans, raising concerns about potential delays to BoJ’s normalisation path. However, in recent weeks, rapid currency depreciation elevated imported inflation risk and forced a hawkish pivot, with Governor Kazuo Ueda signalling willingness to consider imminent rate increases as tariff risks receded. This marked a critical turning point, establishing foundation for monetary normalisation in 2026.

2026 outlook

• Yield differential convergence to drive yen appreciation

Narrowing interest rate differential between US and Japanese bonds represents a fundamental driver for yen strength in 2026. As BoJ proceeds with measured rate increases while Fed implements one to two cuts, yield gap that has long supported dollar strength will continue tightening. This convergence should exert sustained downward pressure on USD/JPY throughout the year.

With tariff uncertainties and policy direction under Takaichi administration becoming clearer, the yen appears positioned to gradually close gap with its fair value. Various purchasing power parity models – which compare relative value of currencies based on cost of identical goods across countries – estimate yen’s equilibrium range between 80 to 125 per dollar, suggesting current levels remain materially overvalued for dollar.

USD/JPY movement deviates from yield spread fundamentals

• Currency intervention and carry trade dynamics add complexity

Conversely, should USD/JPY approach 160 – near levels that triggered government intervention in 2024 – Japanese authorities will likely deploy currency measures to cap further dollar strength. This intervention threshold provides a technical ceiling for pair.

More significantly, sharp currency movements in either direction could accelerate unwinding of yen carry trades. Carry trades involve borrowing in a low-yielding currency like yen to invest in higher-yielding assets elsewhere, and their unwinding can trigger significant market volatility. Risk of yen carry trade unwinding remains on investors’ radar, with some economists estimating market at around $1 trillion. However, a portion of this unwinding already occurred following August 2024 episode.

Evidence suggests notable deleveraging has taken place: cross-border loans denominated in yen declined 10% in H1 2025, while Commodity Futures Trading Commission (CFTC) positioning data shows speculators have stayed in net long yen positions – a stark reversal from bearish stance that precipitated last summer’s turmoil. Moreover, as yield spread between Japan and other major economies, particularly US, has narrowed considerably, fundamental appeal of yen-funded carry trades has diminished materially. While sharp currency movements could still trigger volatility spillovers into broader markets, reduced carry trade footprint suggests any unwinding would be more gradual than disruptive episode witnessed in 2024.

Technical analysis

Technical analysis shows an unfavourable picture for the yen. Current trend in USD/JPY weekly chart is dominated by rising channel established since April 2025, though there are some early signs of trend potentially reverting following BoJ’s recent hawkish turn and as relative strength index (RSI) approached overbought territory. Technical trend also explains capped gains for the yen in our base case analysis above.

USD/JPY should face some resistance around 158.9, but a decisive breach would open path towards 161.9. Conversely, previous resistance levels at around 150 should provide immediate support, followed by material support from 200-week MA at around 144.

USD/JPY weekly candlestick chart

Convergence of multiple factors – BoJ monetary normalisation, narrowing yield differentials, and mean reversion toward fair value – establishes foundation for gradual yen appreciation in 2026.

We expect USD/JPY to trade between 151 – 155 in first quarter (Q1), with near-term volatility likely around timing of BoJ rate hikes, particularly if the BoJ fails to provide clarity on rate increase path next year. As policy trajectories become more established throughout year, pair should decline toward 146 – 148 by year end, representing a 5% – 6% decline from current levels.

Investors should monitor BoJ communication closely, as pace and magnitude of rate increases will ultimately determine whether the yen realises its full appreciation potential. While risks from carry trade adjustments and potential intervention add complexity, fundamental case for a stronger yen remains compelling as Japan’s policy normalisation advances.

EUR/USD

2025 performance overview

EUR/USD delivered strong returns of 12.9% in 2025. After eight rate cuts brought the deposit rate from 4.00% to 2.00%, ECB paused its easing cycle in the second half. President Christine Lagarde described policy as being in ‘a good place’.

Germany’s historic shift toward fiscal expansion provided significant support for the currency. Following its February election, the new coalition passed a landmark €1 trillion spending package. This included a €500 billion infrastructure fund and a sharp increase in defence spending – ending decades of German fiscal conservatism.

France’s political turmoil, however, limited euro gains. Deep divisions in parliament prevented agreement on spending cuts, leading to frequent changes in prime minister. Deficits remained near 6% of GDP, resulting in credit rating downgrades from major agencies.

2026 outlook 

• Dollar weakness and German fiscal support drive 2026 gains

EUR/USD gains in 2026 will be driven mainly by USD weakness rather than intrinsic euro strength. Fed is expected to implement one to two rate cuts as it moves toward a neutral policy stance, responding to moderating US growth and labour market softness.

Meanwhile, ECB is widely expected to maintain rates at current levels throughout 2026. With inflation projected at 1.7% in 2026 before rising to 1.9% in 2027, there is no urgency to adjust policy. This divergence between central banks creates a tailwind for EUR/USD appreciation, as interest rate differentials that have long supported dollar strength continue to narrow.

Germany’s fiscal stimulus adds further support by improving eurozone growth prospects. Goldman Sachs estimates the €500 billion infrastructure spending could boost Germany’s GDP growth from 0.3% this year to 1.4% in 2026. European Commission modelling suggests positive spillovers lifting broader EU GDP. This expansion strengthens domestic demand and positions Europe’s economy to narrow the growth gap with US, reinforcing the case for EUR/USD appreciation.

• French political risk constrains upside potential

France’s ongoing political dysfunction remains the main constraint on euro strength. Public debt is projected to exceed 120% of GDP by 2029 without spending cuts, dampening investor appetite.

The spread between French and German 10-year bonds widened to 86 bp in October 2025, reflecting heightened risk premiums. France may enter 2026 without an approved budget. Analysts estimate this uncertainty could reduce France’s 2026 GDP growth by 0.2 percentage points.

While spillover risks have been limited so far, France’s systemic importance means contagion remains a tail risk if the crisis deepens.

Technical analysis

Weekly chart reveals EUR/USD’s bullish medium-term trend following recent consolidation, though pair is currently range-bound between 1.15 - 1.17. Immediate resistance sits at 1.19 where recent peak in September occurred. Clearing this resistance would create an opportunity to test May 2021 high at 1.22. Any correction should find support around 1.15 before testing May low at 1.11.

EUR/USD weekly candlestick chart

We maintain a cautiously positive view on EUR/USD for 2026, with modest gains expected as dollar weakness remains the primary driver. Our base case anticipates the pair gradually strengthening toward 1.19 - 1.21 by year end as German fiscal stimulus gains traction.

However, euro appreciation will likely lag major Asia-Pacific currencies due to France’s persistent political constraints and ECB’s mildly dovish stance.

• _{Source: TradingView. The figures stated are as of 11 December 2025. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.}