FX Markets in 2026: Growth, Liquidity, and a Dollar Full of Surprises
We have spent the first 3 weeks of January speaking to and interviewing all 38 of our global banking partners and their FX analysts, and there are some very interesting forecasts from some of these banks.
We have collated this data and produced an average forecast for all key currency pairs for 2026, which will allow you as a business to plan effectively, create budgets, and ultimately protect yourselves from FX risk and volatility. Contact us today and we will send you the latest report.
As we step into 2026, foreign‑exchange markets are being shaped by a mix of strong global growth, a resilient euro, and ongoing uncertainty around the US dollar. While the consensus view appears confident, the year ahead may hold a few surprises.
Let’s break down the major themes.
A Bright Start: Global Growth Holds Steady
The global economy is expected to maintain solid momentum throughout 2026. Strong productivity, healthy consumer spending—especially across emerging markets—and robust corporate earnings are all helping support global expansion.
That said, the familiar growth gap between the US and the eurozone is set to continue.
Eurozone GDP is expected to hover around 1%, roughly in line with its long‑term potential.
US GDP, by contrast, is projected to grow between 2.5% and 3%, supported by productivity gains near 2.5% and an unemployment rate around 4.5%.
A key driver of this divergence? The rapid adoption of artificial intelligence, which continues to boost efficiency and output in the US economy.
The Hidden Engine: Global Liquidity
One of the less talked‑about forces behind global resilience is liquidity—the amount of money circulating in the financial system. And in 2026, liquidity is set to surge. Several major economies are injecting support simultaneously:
70% of central banks are at or near the end of their rate‑cutting cycles.
The US Federal Reserve has paused quantitative tightening, the government is running record deficits, and additional $2,000 stimulus checks are still being discussed.
China is posting its largest budget deficit ever.
Japan is preparing a $110 billion stimulus package.
The EU plans to allocate around $1 trillion toward defence spending.
Put simply: the world is awash in liquidity—and that’s a powerful backdrop for stronger growth.
The US Dollar: Fading? Maybe. Linear Decline? Not So Fast
Market consensus suggests the dollar will continue to weaken, with predictions of EUR/USD reaching 1.20 by Q2 2026. But such uniform optimism should raise caution flags. In reality, the path for the dollar is unlikely to be smooth or predictable.
Flows and Momentum Matter More Than Fundamentals
If 2025 taught us anything, it’s that market flows and momentum often outweigh traditional macro factors like trade balances, interest‑rate differentials, or geopolitics.
Last year’s dollar weakness wasn’t driven by US protectionism, as some claimed. Instead, it stemmed from large outflows from US equities, particularly from hedge funds taking profit after a strong 2024 for tech stocks. These funds rotated—tactically and temporarily—into undervalued European equities, where sentiment was improving thanks to:
Germany’s fiscal stimulus announcement
Misplaced optimism about a rapid resolution to the war in Ukraine
Now the Tide Is Turning
This year, the flow is reversing. Capital is moving back into US equities, especially tech, where valuations once again look attractive after last November’s market correction. If these inflows build, they could lend medium‑term support to the US dollar.
Additionally, as the Fed cuts rates, the appeal of money‑market yields is diminishing on both sides of the Atlantic. With hundreds of billions parked in cash, a shift back into equities—especially US equities—could indirectly strengthen the greenback.
British Pound: Rate Differentials Take Centre Stage
Markets continue to speculate about possible further rate cuts from the European Central Bank. But we believe the ECB is likely done easing. Financial conditions in the eurozone are already accommodative, and the region’s core problem—weak domestic demand—won’t be solved by slightly lower rates.
Our expectation:
ECB holds rates at 2% all year
Bank of England cuts twice in H1, bringing UK rates down to 3%
This widening rate differential should favour the euro, potentially pushing EUR/GBP toward 0.89 in the coming months.
Japanese Yen: Drifting Toward New Lows
Don’t expect a major reversal in EUR/JPY this year. Despite common belief, a weak yen actually benefits Japan by boosting revenues for exporters—one reason Japanese equities have performed so well recently.
Even if the Bank of Japan increases rates by 25 basis points, we doubt it will be enough to halt further yen depreciation. If current trends persist, EUR/JPY could test new all‑time highs near 190, unless Japanese authorities step in to curb volatility.
Chinese Yuan: Stability First
China’s Central Economic Work Conference—an important policy‑setting meeting—brought few surprises. Policymakers emphasized:
Gradual rate cuts to support the property sector
A firm commitment to exchange‑rate stability, continuing the approach of 2023 and 2024
Talk of yuan devaluation continues to surface, but such fears are misplaced. China’s exports now carry higher value‑added content, meaning a weaker currency offers limited competitive advantage. Meanwhile, the risks—particularly capital flight—are significant. In short, China has little incentive to pursue devaluation.