FX Market Outlook from Analysts at MUFG
Source:
MUFG Monthly Foreign Exchange Outlook — May 2026
This material is based on MUFG Research and adapted for educational purposes.
US Dollar Outlook — May 2026
MP Finance Interpretation
KEY LEVELS AND FORECAST
Spot (04.30.2026)
|
Pair |
Value |
|---|---|
|
USD/JPY |
156.66 |
|
EUR/USD |
1.1728 |
MUFG Forecast
|
Pair |
Q2 2026 |
Q3 2026 |
Q4 2026 |
Q1 2027 |
|---|---|---|---|---|
|
USD/JPY |
158.00 |
156.00 |
154.00 |
152.00 |
|
EUR/USD |
1.1500 |
1.1800 |
1.2000 |
1.2000 |
Market Consensus
|
Pair |
Q2 2026 |
Q3 2026 |
Q4 2026 |
Q1 2027 |
|---|---|---|---|---|
|
USD/JPY |
157.00 |
155.00 |
153.00 |
152.00 |
|
EUR/USD |
1.1700 |
1.1900 |
1.2000 |
1.2000 |
INTEREST RATE OUTLOOK
|
Indicator |
Current |
Q2 2026 |
Q3 2026 |
Q4 2026 |
Q1 2027 |
|---|---|---|---|---|---|
|
Policy Rate |
3.64% |
3.63% |
3.38% |
3.13% |
3.13% |
|
3M T-Bill |
3.66% |
3.65% |
3.30% |
3.10% |
3.10% |
|
10Y Yield |
4.37% |
4.25% |
4.00% |
3.88% |
3.88% |
MARKET INTERPRETATION
According to MUFG Research, the current dynamics of the US dollar appear atypical in terms of classic macroeconomic relationships. Despite rising oil prices and higher short-term rates, the USD shows weakness against major currencies – both against the euro and the Japanese yen.
This suggests that the market is currently driven primarily by risk appetite and positioning. The sustained stock market rally, including over 10% gains in the S&P 500 within a month, coupled with strong corporate earnings, creates an environment where investors are in no hurry to shift to safe-haven assets.
At the same time, it is important that even after a significant rise, oil prices have not yet reached levels that would force the market to price in a full-blown global recession scenario. In real terms, they remain relatively moderate, allowing risk assets to remain resilient.
However, such a structure is inherently unsustainable. Further increases in energy prices could shift the balance by intensifying inflationary pressures, reducing demand, and revising expectations for the economic cycle. In this case, the market could enter a risk-off phase, creating preconditions for a more pronounced short-term strengthening of the dollar.
The monetary factor is also shifting. Although the Fed left rates unchanged, internal divisions within the FOMC are intensifying. Some committee members advocate for reducing the "dovish" bias in policy, indicating a gradual shift towards a more hawkish stance. Potential changes in the composition of the Board of Governors could further reinforce this trend.
This means that the likelihood of a rapid transition to a rate-cutting cycle is decreasing, and the period of tight financial conditions may be longer than the market expects.
The baseline scenario anticipates a possible rate cut only towards the end of the year, and it largely depends on oil market dynamics. If geopolitical tensions ease and energy prices begin to decline, this would create room for policy easing.
However, a key risk remains the scenario of prolonged escalation, particularly in the event of supply disruptions through the Strait of Hormuz. This could sustain high inflation and force the Fed to remain on hold for longer, even amid weakening economic activity.
In the medium term, the fundamental backdrop for the dollar appears weak. The combination of a cyclical slowdown in the US economy and political uncertainty creates preconditions for a resumption of the USD weakening trend in the second half of 2026 after a possible short-term strengthening.
Regarding interest rates, expectations are also shifting. The forecast suggests fewer rate cuts than previously, with an emphasis on a later start to the easing cycle. At the same time, restrictive policy is already putting pressure on small and medium-sized businesses, the real estate market, and other rate-sensitive segments of the economy.
The impact of high energy prices on inflation is assessed as mixed: on the one hand, they support the overall inflation level, and on the other hand, they reduce demand, limiting pressure on core inflation. This creates a complex environment for Fed decisions.
KEY FACTORS TO WATCH
- Brent dynamics as a key trigger for market regime change
- S&P 500 reaction to further increases in energy prices
- Behavior of short-term US rates and expectations for Fed policy
- FOMC communication and the balance of power within the committee
- Geopolitical risks, particularly developments in the Middle East
Japanese Yen Outlook — May 2026
MP Finance Interpretation
KEY LEVELS AND FORECAST
Spot (04.30.2026)
|
Pair |
Value |
|---|---|
|
USD/JPY |
156.66 |
|
EUR/JPY |
183.73 |
MUFG Forecast
|
Pair |
Q2 2026 |
Q3 2026 |
Q4 2026 |
Q1 2027 |
|---|---|---|---|---|
|
USD/JPY |
158.00 |
156.00 |
154.00 |
152.00 |
|
EUR/JPY |
181.70 |
184.10 |
184.80 |
182.40 |
Market Consensus
|
Pair |
Q2 2026 |
Q3 2026 |
Q4 2026 |
Q1 2027 |
|---|---|---|---|---|
|
USD/JPY |
157.00 |
155.00 |
153.00 |
152.00 |
|
EUR/JPY |
184.00 |
184.00 |
184.00 |
181.00 |
INTEREST RATE OUTLOOK
|
Indicator |
Current |
Q2 2026 |
Q3 2026 |
Q4 2026 |
Q1 2027 |
|---|---|---|---|---|---|
|
Policy Rate |
0.75% |
1.00% |
1.00% |
1.25% |
1.25% |
|
3M Bill |
0.81% |
1.10% |
1.10% |
1.30% |
1.30% |
|
10Y Yield |
2.53% |
2.50% |
2.50% |
2.60% |
2.60% |
MARKET INTERPRETATION
According to MUFG estimates, the Japanese yen's performance in April was mixed. On the one hand, the currency strengthened against the US dollar from 159.00 to 156.66, but this strengthening occurred almost entirely on the last trading day of the month. On the other hand, the yen weakened somewhat against the euro, highlighting the currency's lack of broad-based strength.
The key driver of the movement was likely currency intervention. Following a "final warning" from Japan's Vice Minister of Finance regarding speculative yen selling, the market saw a sharp drop in USD/JPY of approximately five figures. While there was no official confirmation, the nature of the movement and reports from authoritative sources suggest a high probability of intervention.
At the same time, MUFG is skeptical about the effectiveness of such actions. The current weakness of the yen is not solely due to speculative positions but primarily fundamental factors, including:
- deterioration of terms of trade due to high energy prices
- a significant interest rate differential between Japan and other economies
Positioning data also indicates that speculative short yen positions are significantly smaller than during previous interventions in 2024, which reduces the effectiveness of such measures.
Despite this, the Bank of Japan is gradually shifting its tone. At the April meeting, the policy rate remained unchanged at 0.75%, but the 6-3 vote split demonstrates growing support for a rate hike. Updated inflation forecasts also signal a shift in the balance of risks.
Specifically:
- the core-core CPI forecast for FY27 has been raised from 2.1% to 2.6%
- the forecast for FY28 is 2.2%
This indicates that the price stability target has effectively been met, and risks are shifting towards exceeding the target level. The Bank of Japan itself emphasizes the need to carefully monitor the risks of overshooting the inflation target.
However, the market reacted cautiously to these signals due to Governor Ueda's restrained rhetoric, who noted that confidence in the baseline scenario had significantly decreased. This limited the immediate impact on the currency market.
MUFG's baseline scenario foresees a 25 basis point rate hike as early as June, provided a gradual de-escalation and resumption of energy supplies. In such a scenario, the inflationary environment would remain strong enough for further policy normalization.
Nevertheless, the external environment remains a key driver. The combination of high global yields and sustained risk appetite creates a favorable environment for selling yen. This means that the potential for a retest of the 160.00 level for USD/JPY remains.
However, MUFG believes that the likelihood of interventions and a Bank of Japan rate hike will limit further currency weakening. In the medium term, this sets the stage for a gradual strengthening of the yen.
Regarding interest rates, expectations are also shifting. Rising inflationary risks, particularly due to the energy factor and the possible prolonged closure of the Strait of Hormuz, have already led to a rise in 10-year JGB yields to 2.53%. The combination of high energy prices, loose monetary policy, and an undervalued yen creates conditions for further yield increases.
An additional risk is the possible expansion of government support for households amid rising living costs, which could further push long-term rates higher.
The Bank of Japan, meanwhile, continues to appear cautious in its actions, creating a risk of "falling behind the curve." Given the inflation forecasts, there is a need to raise rates to bring the real rate closer to a neutral level.
Even in a scenario of gradually declining oil prices after the resumption of supplies through the Strait of Hormuz, MUFG expects further rate hikes and, consequently, a gradual increase in JGB yields in the medium term.
KEY FACTORS TO WATCH
- Potential currency interventions by the Japanese Ministry of Finance
- Bank of Japan decisions (especially the June meeting)
- Dynamics of global yields and interest rate differentials
- USD/JPY level near 160 as an intervention risk zone
- Situation in the energy market and supplies through the Strait of Hormuz
Euro Outlook — May 2026
MP Finance Interpretation
KEY LEVELS AND FORECAST
Spot (04.30.2026)
|
Pair |
Value |
|---|---|
|
EUR/USD |
1.1728 |
|
EUR/JPY |
183.73 |
MUFG Forecast
|
Pair |
Q2 2026 |
Q3 2026 |
Q4 2026 |
Q1 2027 |
|---|---|---|---|---|
|
EUR/USD |
1.1500 |
1.1800 |
1.2000 |
1.2000 |
|
EUR/JPY |
181.70 |
184.10 |
184.80 |
182.40 |
Market Consensus
|
Pair |
Q2 2026 |
Q3 2026 |
Q4 2026 |
Q1 2027 |
|---|---|---|---|---|
|
EUR/USD |
1.1700 |
1.1900 |
1.2000 |
1.2000 |
|
EUR/JPY |
184.00 |
184.00 |
184.00 |
181.00 |
INTEREST RATE OUTLOOK
|
Indicator |
Current |
Q2 2026 |
Q3 2026 |
Q4 2026 |
Q1 2027 |
|---|---|---|---|---|---|
|
Policy Rate |
2.00% |
2.25% |
2.50% |
2.50% |
2.50% |
|
3M Bill |
2.15% |
2.45% |
2.60% |
2.55% |
2.50% |
|
10Y Yield |
3.04% |
3.10% |
3.00% |
2.90% |
2.70% |
MARKET INTERPRETATION
According to MUFG estimates, the euro strengthened against the US dollar in April, rising from 1.1524 to 1.1728. However, this increase was less pronounced compared to other G10 currencies, indicating the euro's relative weakness even in an environment favorable to risk assets.
A key factor holding back the euro's potential is energy risk and geopolitical uncertainty. Europe remains significantly more vulnerable to disruptions in energy supplies than other developed economies. In particular, about 50% of imported jet fuel and approximately 20% of diesel fuel pass through the Strait of Hormuz.
This creates the risk of a "tipping point," where a shortage of refined petroleum products begins to directly impact economic activity. According to energy agencies, this moment could arrive as early as June, especially in the jet fuel market.
Currently, the situation is partially alleviated by increased production in the Amsterdam-Rotterdam-Antwerp region, but fuel reserves are rapidly depleting. Over the past two weeks, diesel and gas oil stocks have fallen by approximately 11%, reaching eight-month lows. This exacerbates risks for the Eurozone economy.
In the short term, this means that the risks for the euro are tilted towards gradual weakening, as the market begins to price in the potential negative impact on economic activity.
If the energy supply situation does not improve and the Strait of Hormuz remains closed for longer, it could lead to a significant deterioration of the global risk backdrop. In such a scenario, investors will be forced to re-evaluate recession risks, creating additional pressure on the euro.
At the same time, the ECB's monetary policy remains an important supportive factor. At its April meeting, the deposit rate was kept at 2.00% after a cumulative reduction of 200 bps in 2024–2025. However, the ECB's rhetoric is becoming more hawkish.
ECB President Christine Lagarde explicitly stated that she "knows the direction of rates," hinting at further hikes. She also emphasized that a lack of de-escalation of the conflict by June would have a significant impact on policy.
The market has already priced in these signals — expectations for rate hikes in June and September are almost fully incorporated into prices. MUFG has also revised its forecast, shifting its rate hike expectations from earlier dates to June and September.
Thus, a complex balance is forming:
- on the one hand, risks to the economy due to the energy factor are weighing on the euro
- on the other hand, a tighter ECB policy supports the currency through interest rate differentials
In the medium term, the base scenario assumes de-escalation of the conflict and a gradual decrease in energy prices, which will allow the Eurozone economy to stabilize. In this case, EUR/USD has the potential to return to levels around 1.2000 by year-end.
Regarding the bond market, 10-year German bund yields remained relatively stable in April, closing at 3.04%. Despite expectations of rate hikes, the market has already largely priced in these moves, limiting the potential for further yield increases.
Further dynamics will depend on the balance between inflationary risks and economic activity. On the one hand, a prolonged energy crisis could increase inflationary pressure, while on the other, it could trigger an economic slowdown, creating a disinflationary effect.
In the event of a de-escalation scenario and falling oil prices, MUFG expects a moderate decline in long-term yields in the second half of the year, consistent with a more stable macroeconomic environment.
KEY FACTORS TO WATCH
- Status of energy supplies through the Strait of Hormuz
- Dynamics of diesel and jet fuel inventories in Europe
- ECB decisions (June and September)
- Eurozone inflation rate and policy reaction
- Overall risk backdrop and probability of a recession in Europe
Sterling Forecast — May 2026
MP Finance Interpretation
KEY LEVELS AND FORECAST
Spot (30.04.2026)
|
Pair |
Value |
|---|---|
|
EUR/GBP |
0.8638 |
|
GBP/USD |
1.3578 |
|
GBP/JPY |
212.71 |
MUFG Forecast
|
Pair |
Q2 2026 |
Q3 2026 |
Q4 2026 |
Q1 2027 |
|---|---|---|---|---|
|
EUR/GBP |
0.8750 |
0.8800 |
0.8850 |
0.8900 |
|
GBP/USD |
1.3140 |
1.3410 |
1.3560 |
1.3480 |
|
GBP/JPY |
207.70 |
209.20 |
208.80 |
204.90 |
Market Consensus
|
Pair |
Q2 2026 |
Q3 2026 |
Q4 2026 |
Q1 2027 |
|---|---|---|---|---|
|
GBP/USD |
1.3400 |
1.3500 |
1.3500 |
1.3600 |
INTEREST RATE OUTLOOK
|
Indicator |
Current |
Q2 2026 |
Q3 2026 |
Q4 2026 |
Q1 2027 |
|---|---|---|---|---|---|
|
Policy Rate |
3.75% |
4.00% |
4.25% |
4.25% |
4.00% |
|
3M Bill |
3.96% |
4.15% |
4.35% |
4.30% |
3.95% |
|
10Y Yield |
5.01% |
5.10% |
5.00% |
4.80% |
4.50% |
MARKET INTERPRETATION
According to MUFG's estimates, the pound sterling showed strong performance in April. GBP/USD rose from 1.3203 to 1.3578, and the pound also strengthened against the euro: EUR/GBP fell from 0.8728 to 0.8638. Within the G10, the pound was the third strongest currency of the month, surpassed only by the Australian dollar and the Norwegian krone.
One of the key factors supporting the pound was the sharp rise in UK bond yields. The Gilt yield curve rose more sharply than in the US or the Eurozone, as the British market remains particularly sensitive to inflationary risks. This is important because in an environment of high inflationary uncertainty, investors begin to demand greater compensation for holding British bonds.
Market inflation expectations in the UK also rose more significantly than in the US and the Eurozone. Specifically, the 5y5y inflation swap rate increased by approximately 15 bps since the beginning of the year. This confirms that the market views UK inflation risk as more persistent and potentially more challenging for the Bank of England.
Macroeconomic data in the UK remains mixed. On one hand, GDP figures indicate that the economy entered the Middle East conflict period stronger than expected. Three-month GDP growth to February was 0.5%, and industrial production in February also rose by 0.5% m/m.
On the other hand, sentiment indicators are already signaling a risk of a sharper slowdown if the Middle East conflict prolongs. The CBI Business Optimism Index fell from -19 in Q1 to -65 in Q2. Excluding the COVID period, this is the worst figure since Q3 1980. Such a signal is important because business sentiment often deteriorates before it fully manifests in actual economic data.
The Bank of England, at its April meeting, left the key interest rate unchanged at 3.75%, after six 25 bps cuts since August 2024. However, the voting structure showed new divisions within the MPC: the decision was made by an 8-1 vote, with Huw Pill advocating for a 25 bps rate hike.
This is an important signal. After a period of rate cuts, the Bank of England is again forced to consider a hike scenario due to inflation risk. In its Monetary Policy Report, the bank presented three scenarios for future policy, all of which indicated a likely need for rate hikes.
The median scenario, which is closest to MUFG's baseline assumption of de-escalation and gradual energy price declines, implies two to three rate hikes. This is why MUFG now expects two rate hikes—in June and August—which should raise the policy rate to 4.25%.
However, the support for the pound from high rates has limitations. If yields rise due to a strong economy and controlled inflation, it is positive for the currency. But if yields rise due to inflationary stress, fiscal risks, or political instability, it can start to hurt the currency.
This particular risk is key for the pound. According to MUFG, the political situation in the UK is becoming more unstable. Prime Minister Starmer is weakened ahead of the local elections on May 7. Although the government won a parliamentary vote on a potential ethics investigation, 15 Labour MPs supported the opposition, and another 53 did not vote. This indicates weakening support within the party.
Expectations of a weak Labour result in the local elections increase the risk of intra-party pressure. MUFG notes that the likelihood of an attempt to change leadership in the summer, before the annual party conference season, is growing.
If political instability coincides with further increases in oil prices, it could destabilize the Gilt market again. In such a case, high yields would cease to be a support for the pound and would begin to be perceived as a sign of risk. This could lead to weaker GBP dynamics, especially against the euro.
In terms of rates, the 10-year Gilt yield closed at 5.01% in April, rising by 9 bps. This is the first close above 5.00% since July 2008, i.e., before the worst phase of the global financial crisis. Such a level underscores how seriously the market is re-evaluating the UK's inflationary and fiscal risks.
The OIS market has already more than fully priced in the expected rate hikes, so MUFG does not anticipate a significant additional rise in the 10-year yield simply due to two BoE hikes. If de-escalation occurs in the second half of the year and energy prices gradually decline, yields could moderately decrease from historically high levels.
In currency terms, MUFG's core conclusion is that the pound may lose some of its rate-driven support due to political and fiscal risks. Therefore, GBP is expected to underperform against the euro, even if the US dollar weakens in the broader context.
KEY FACTORS TO WATCH
- Dynamics of 10-year Gilt yields near historically high levels
- Bank of England decisions in June and August
- UK inflation expectations, especially 5y5y inflation swaps
- Business sentiment and risk of a sharper economic slowdown
- Local elections on May 7 and the risk of political instability
- Potential pressure on Starmer and the risk of a Labour leadership change
- EUR/GBP dynamics as an indicator of the pound's relative weakness against the euro
Interpretation: MP Finance