Forex

Dollar Direction:

The U.S. Dollar Index has stabilized around 99.4 after logging its worst annual performance since 2017, correcting approximately 10% from its early 2025 highs near 110. Traders are now pricing roughly two Fed cuts in 2026, with expectations for the next reduction pushed back to June as strong labor data—weekly jobless claims came in well below forecasts—tempers dovish sentiment. The 10-year Treasury yield has recovered toward 4.2%, restoring some dollar appeal, while Morgan Stanley forecasts a "V-shaped" year: DXY falling to around 94 by Q2 before rebounding to 100 by year-end as fiscal stimulus kicks in.

Eurozone Resilience:

The ECB held its deposit rate steady at 2.0% for a fourth consecutive meeting in December, with President Lagarde emphasizing that policy is in a "good place" as inflation hovers at 2.2%—just above target. That stability, combined with narrowing rate differentials as the Fed eased 100 basis points in 2025, has allowed EUR/USD to consolidate near 1.165—roughly 13% higher year-to-date despite recent pullback from September highs above 1.19. MUFG sees EUR/USD trading above 1.20 over the cycle, while UBS targets 1.20 if Eurozone growth proves resilient, though Citi warns the pair could retreat to 1.10 if U.S. growth reaccelerates and the Fed cuts less than markets expect.

Sterling Stands Its Ground:

The Bank of England cut rates to 3.75% in December—its lowest since early 2023—but a razor-thin 5–4 vote exposed deep divisions on the MPC about further easing. Markets now price roughly two additional cuts in 2026, with expectations for the base rate to reach 3.25%–3.5% by year-end as inflation eased to 3.2% in November, below the BoE's forecast. Cable has rallied toward $1.35, approaching multi-month highs, as concerns over Fed independence and dollar weakness offset UK growth worries. Morningstar forecasts a modest 1.5% gain against the dollar in 2026, while Bank of America sees potential for sterling to rally against the euro if UK economic growth surprises to the upside in Q1—though political uncertainty around potential Labour leadership challenges remains a downside risk.

Last updated: January 18, 2026