As we step into 2026, the foreign exchange market presents a complex web of opportunities and risks shaped by divergent monetary policies, evolving global growth dynamics, and shifting geopolitical tensions. This comprehensive forecast aims to equip traders, investors, and finance enthusiasts with both a clear narrative and practical insights to help navigate the year ahead with confidence.

We delve into the major currency pairs, outline the broader economic context, and highlight key risks that could redefine market trajectories. By understanding these interconnected forces, you can develop strategies that align with long-term trends while remaining agile in the face of unexpected events.

Central Thesis & Market Direction

The overarching theme for 2026 is continued US dollar depreciation amid a pronounced divergence in global monetary policy. The US dollar has already weakened substantially, with a year-to-date decline of 9.1% in 2025 and a similar drop on a DXY basis, setting the stage for further losses.

By year-end, we expect the Dollar Index to gravitate toward the mid-90s range, reflecting an additional 5% decline. This trend is underpinned by the Federal Reserve’s shift from a tightening cycle to an easing stance, which contrasts sharply with other central banks that may maintain or even tighten their policies in response to domestic economic conditions.

Within this framework, traders must focus on the interplay of interest rate differentials, yield curves, and central bank communications to anticipate market reactions. The potential for a two-tier world of monetary policy creates fertile ground for both trends and volatility, offering numerous entry points for discerning market participants.

Major Currency Pair Forecasts

The following sections provide detailed projections for the currency pairs that dominate global forex turnover. Each forecast combines fundamental drivers, technical levels, and strategic considerations to inform your trading or investment decisions.

USD/JPY

USD/JPY is projected to trade within a 151-155 range in Q1 before easing toward 146-148 by the end of 2026. This path represents a 5%-6% decline from current levels, signaling a notable shift after years of yen weakness.

Key drivers include:

• BoJ policy normalisation narrowing yield differentials
• Fed rate cuts reducing US real yields
• Volatility spikes around policy meeting announcements

Near-term volatility may spike around BoJ meetings if guidance lacks clarity, creating sharp intraday moves. Technical resistance lies near 158.9, with critical support at 150 followed by the 200-week moving average around 144. Traders should watch for momentum signals at these levels to gauge entering or exiting positions.

EUR/USD

After delivering a robust 12.9% return in 2025, EUR/USD is forecast to strengthen gradually toward 1.19-1.21 by year-end 2026. This advance is driven more by US dollar weakness rather than euro strength, highlighting the impact of policy divergence.

Inflation in the eurozone is projected to remain below target, allowing the European Central Bank to keep rates steady at 2.00% throughout 2026. Germany’s ambitious €500 billion infrastructure package should boost regional growth, complementing spillover effects across the EU.

• ECB rate stability at current levels reducing policy uncertainty
• Fiscal stimulus in Germany lifting GDP forecasts for the broader eurozone
• Narrowing US-EU yield differentials favoring euro appreciation

Traders eyeing new highs should monitor resistance at 1.19 before testing the May 2021 peak near 1.22. On the downside, support at 1.15 and a potential test of the 1.11 May low could provide entry points for offensive euro positions.

AUD/USD

The Australian dollar is poised for a steady recovery, with targets of 0.6940-0.6950 by mid-2026 and 0.70 by year-end. Longer-term forecasts extend to 0.72 by end-2027, implying roughly 7% appreciation over two years.

Australia’s commodity export strength, particularly in iron ore, coal, and agricultural goods, underpins this outlook. Renewed narratives around copper, rare earths, and gold further diversify the country’s comparative advantage. Moreover, improving global risk sentiment should favor higher-yielding currencies like the AUD over the low-yielding dollar.

• Robust demand for Australian exports
• Improved global risk sentiment supporting AUD
• Attractive rate differentials favoring Australian currency

Reduced hedging ratios by superannuation funds eliminate a structural drag, adding an additional tailwind. Watch resistance around 0.70, with support near 0.6700 as tests of the 200-day moving average underscore trend strength.

Other Currency Pair Snapshots

USD/CNY projected to decline to near 6.8000 by Q4 2026, reflecting 2.8% yuan appreciation as more aggressive Fed easing contrasts with measured PBoC cuts. Chinese fiscal support and a modest appreciation bias from authorities underpin this move, though geopolitical tensions remain a headwind.

GBP/USD outlook points to a moderate sterling recovery versus the dollar. However, the pound may underperform against the euro, as the ECB holds rates while the Bank of England likely cuts rates in 2026.

EUR/JPY rebound is expected as yen strength outpaces euro gains, driven by BoJ normalisation and less aggressive ECB policy. Traders may find opportunities in cross-currency pairs to hedge directional bets.

SEK/USD sees potential upside through higher hedging ratios, looser global financial conditions, and a broadly supportive domestic backdrop. The krona could outperform other G10 currencies if risk sentiment remains positive.

Forecast Summary Table

Broader Market Context

Global economic growth is forecast at 2.8% growth in 2026, surpassing the consensus of 2.5% and driven by resilient activity in the United States and China. Emerging markets are also likely to benefit from improved fiscal positions and attractive bond yields, attracting greater capital inflows.

The US labour market exhibits some softness, with potential over-reporting in nonfarm payrolls and early signs of cooling. This dynamic supports a bearish dollar bias in H1 2026, setting the stage for a Fed easing cycle that may include three to four rate cuts, possibly reaching a terminal rate of 3.25% by mid-year.

Volatility, which has been subdued relative to historical norms, could re-emerge around key central bank meetings and geopolitical developments. Traders should prepare for intermittent spikes in FX volatility, even in the context of longer-term trending moves.

Risks and Caveats

Geopolitical tensions, particularly between the US and China, pose significant tail risks that could disrupt the expected trajectory of currency pairs. A sudden escalation could trigger safe-haven flows, potentially reversing positions in yuan or other emerging market currencies.

Monetary policy surprises—such as an accelerated BoJ tightening path or an unexpected ECB rate cut—could invalidate parts of this forecast. Maintaining flexible risk management frameworks and setting clear stop-loss levels are essential for weathering unforeseen policy shifts.

Regional idiosyncrasies, from political developments in France to commodity price swings affecting commodity-linked currencies, underscore the importance of diversifying exposure across pairs and asset classes.

In closing, 2026 offers a dynamic environment shaped by shifting policy landscapes and evolving growth differentials. By combining a data-driven understanding of fundamental drivers with robust technical analysis, market participants can position themselves to capture opportunities and mitigate risks in the ever-changing foreign exchange market.