The market in early autumn 2026. An overview of forecasts and reports from analytical institutions
The beginning of September 2026 finds the foreign exchange market in an unusual combination of factors. On the one hand, the US dollar remains a currency with high nominal yields among key developed economies, and the market, after Federal Reserve Chairman Kevin Warsh's speech, sharply revised the probability of a September rate hike. On the other hand, the very nature of US bond movements is increasingly linked not only to the Fed's monetary policy but also to Washington's fiscal policy, US Treasury operations, and concerns about the long-term trajectory of public debt.
In parallel, other G10 central banks are also shifting to more hawkish rhetoric. The ECB faces a new inflationary risk due to natural gas, the Bank of Japan continues policy normalization, and the Bank of England gains more arguments for a cautious approach to rates amid weaker domestic inflationary pressures.
As a result, September becomes a month in which the FX market simultaneously receives decisions from almost all key G10 central banks; RBNZ and Bank of Canada meetings are on September 2, ECB on September 10, FOMC on September 16, BoE on September 17, BoJ on September 18, Norges Bank, Riksbank, and SNB on September 24, and RBA on September 29.
This means that the FX market is entering a period where the difference between interest rate expectations of various central banks becomes one of the main mechanisms for shaping currency flows.
Dollar: August Weakness and the Return of the Interest Rate Factor
In August, the US dollar continued to weaken. The DXY fell by approximately 0.5%, continuing the previous trend. Against the euro, the dollar also weakened: EUR/USD rose from 1.1509 to 1.1598 in London quotes. At the same time, against the Japanese yen, the dollar strengthened: USD/JPY rose from 159.23 to 160.03.
This difference is important because it shows that there is no single mechanism for a "strong" or "weak" dollar. A currency can simultaneously weaken against the euro and strengthen against the yen if changes in interest rates, central bank policies, and capital flows between these countries occur at different speeds.
One of the main factors in the dollar's August movement was the US Treasury's decision to increase planned buybacks of long-term Treasury bonds. The announcement of expanded buyback programs initially raised concerns about an artificial reduction in long-end curve yields.
For FX, this is fundamentally important.
The dollar largely receives support through the interest rate differential. If US long-term yields fall, and yields in other developed countries remain stable or rise, the yield advantage of dollar assets shrinks.
But the August movement also showed the opposite mechanism.
After the initial reaction to Treasury buybacks, yields began to support the dollar again. That is why the USD's reaction to the bond market was not linear: the initial drop in yields was a negative factor for the USD, but the subsequent recovery in yields returned some support to the US currency.
This creates a key problem for traders: it's not enough to just look at the direction of the DXY. You need to understand why Treasury yields are changing.
If the 10Y falls due to expectations of a Fed rate cut, that's one story.
If the 10Y falls due to Treasury buybacks, that's another story.
If the 10Y rises due to higher inflation expectations, that's a third story.
If the 10Y rises due to an increase in term premium and fiscal risk, that's a fourth story.
The same yield movement can have a completely different impact on the currency depending on the cause.
Fed: From Expecting a Pause to the Risk of a September Hike
The most important change in the September picture of US monetary policy was Kevin Warsh's speech at Jackson Hole.
Before that, the market priced in about a 35% probability of a Fed rate hike in September. After Warsh's speech, this estimate rose to approximately 60%.
His key point was that the Fed has "work to do" if inflation does not return to 2% fast enough. Additionally, Warsh noted that financial conditions are not sufficiently restrictive.
For the market, this signaled that the Fed is ready to consider further policy tightening even at a late stage of the cycle.
But here it is important to distinguish market pricing from the Fed's actual decision.
At the time of writing, the market priced in over 50% probability of a hike, but NFP and CPI reports were still due before the meeting. These two reports could change expectations for the September 16 decision.
NFP becomes particularly important in this context.
If the labor market continues to weaken, the argument for an additional rate hike becomes less convincing.
If employment remains robust and inflation does not show sufficient progress towards 2%, the hawkish case for the Fed strengthens.
Therefore, before the September FOMC, the market effectively receives two key filters:
labor market → inflation → Fed pricing → Treasury yields → USD.
Why a September Hike May Not Be a Turning Point
The market may be overestimating Warsh's speech as a form of forward guidance. In his opinion, the Fed chairman's words may primarily reflect his focus on "discipline," rather than a ready-made rate decision; before the meeting, the market had already priced in over 50% probability of a hike, but future NFP and CPI remain crucial for the final decision.
This is fundamentally different from a simple statement like "The Fed will hike."
When the market has already priced in a 60% probability of a hike, the hike itself may have a limited impact on the USD if it is already fully reflected in prices.
Then, a larger move might come not from the decision itself, but from what is priced into the subsequent rate trajectory.
Interest Rate Differential Remains the Main FX Mechanism
The foreign exchange market does not evaluate a central bank in isolation.
It compares it with other central banks.
That's why even a hawkish Fed does not necessarily mean a strong dollar.
If the ECB simultaneously becomes more hawkish, the BoJ continues to raise rates, the RBA considers a hike, and the Norges Bank also approaches a hike, the difference between US and foreign yields may not change significantly enough to create a new powerful impulse for the USD.
This is precisely the point emphasized in the MUFG material: even if the Fed raises rates, it won't necessarily be a game-changer for the dollar, as other central banks are also demonstrating a more hawkish stance than previously expected.
Therefore, the question should not be:
"Will the Fed raise rates?"
but:
"How will the relative trajectory of US rates change against Europe, Japan, the UK, Canada, and other G10?"
It is relative monetary policy that creates FX.
Treasury market: why the long end of the curve became a central theme
August events surrounding Treasury buybacks showed how strongly the foreign exchange market can react to the US bond market.
Increased buyback operations of long-term Treasuries create potential pressure on the long end of the curve.
The US Treasury increased buybacks, and the policy itself raised questions about how strongly the government is trying to influence long-term yields.
The problem is that long-term Treasury yields are determined not only by the Fed rate.
In a simplified form:
10Y Treasury yield ≈ short-term rate expectations + term premium + inflation expectations + fiscal risk + Treasury supply/demand.
Therefore, the Fed can control the short end of the curve much more directly than the 10Y or 30Y.
This is why the attempt to influence long-term yields through Treasury operations attracts so much attention.
The market may ask:
is this normal debt management,
or an attempt to reduce the cost of government financing,
or a sign that the government is increasingly dependent on low yields.
This is the context of the discussion about fiscal dominance.
Fiscal dominance occurs when the financial and debt situation of the state begins to limit the central bank's ability to conduct policy solely according to inflation and the economic cycle.
This is especially important for the USD, as the dollar is a reserve currency.
Therefore, the question of confidence in the US debt market has a potential currency effect.
Europe: Economy Holds Up Better, But Energy Creates New Inflationary Risk
The Eurozone enters September with a more resilient economic picture than previously expected.
Eurozone GDP grew by 0.4% quarter-on-quarter in the second quarter.
Excluding Ireland's volatile contribution, the economy showed growth of approximately 0.3% q/q for four consecutive quarters.
Germany became one of the key growth drivers in the first half of 2026 after a long period of near-zero growth. One of the factors cited is the activation of government spending on defense and infrastructure.
France, conversely, showed no growth in the first half of the year.
This creates additional difficulties for fiscal policy.
Against this backdrop, the rise in French bond spreads becomes an important risk for European assets.
Here again, the link between fiscal policy, the bond market, and FX emerges.
If public finances deteriorate, investors may demand a higher risk premium for government bonds.
Spreads widen.
Financing costs rise.
Financial conditions tighten.
And the foreign exchange market assesses whether the respective country is capable of maintaining a stable macro policy mix.
France: Economic Weakness and Fiscal Risk
The French economy is one of the weaker elements of the European picture.
In the first half of 2026, there was virtually no growth.
This is especially important at a time when the government must conduct budget negotiations and seek ways to reduce the deficit.
The problem lies in the political cycle.
Presidential elections in France are scheduled for 2027.
Therefore, implementing a strict austerity policy becomes politically more difficult.
Thus, weak economic growth + the need for fiscal consolidation + approaching elections create a conflict between economic and political goals.
In such a situation, French bond spreads become one of the indicators to monitor changes in the perception of sovereign risk.
If the spread widens, it could mean that investors are demanding additional compensation for risk.
For EUR, this does not necessarily mean an immediate fall.
But it creates a potential channel for the deterioration of financial conditions within the Eurozone.
Euro: Support from Economic Resilience and the ECB
In August, EUR/USD rose from 1.1509 to 1.1598.
The euro also strengthened on a trade-weighted basis by approximately 0.7%, and the EUR EER reached its highest level since May.
One important signal was the improvement in German business sentiment.
The IFO Business Climate Index rose from 86.7 to 88.8, exceeding expectations, and effectively recovered previous declines.
This is important because EUR/USD is increasingly dependent not only on USD weakness but also on whether its own European growth story is forming.
If EUR simply rises due to a weak USD, the movement may be less sustained.
If European economic data simultaneously improve and the ECB becomes more hawkish, a different type of EUR rally forms.
Gas Becomes One of the Key Macro Factors for EUR
The most problematic factor for Europe remains energy.
TTF natural gas rose by approximately 20% in August, and by about 73% from its late June lows.
Gas prices exceed the assumptions used by the BoE and ECB in their assessments.
In Germany, gas storage levels on August 24 were around 63% of capacity, compared to a five-year average of around 81%.
German gas network operators, meanwhile, indicated that the winter target storage level is practically unattainable.
This creates a very specific macroeconomic problem.
High gas prices:
increase production costs;
increase household expenses;
create pressure on CPI;
reduce real disposable income;
potentially worsen consumption;
simultaneously complicate the ECB's work.
That is, an energy shock can simultaneously be inflationary and negative for growth.
For a central bank, this is one of the most challenging scenarios.
ECB: Inflation Becomes a Problem Again
The ECB deposit rate was 2.25% after the first hike since September 2023 in June.
Against a backdrop of more resilient growth and elevated energy risks, the market almost fully priced in a rate hike in September.
The position of ECB Executive Board member Isabel Schnabel, who emphasized the need to respond to upside inflation risks, is noted separately.
MUFG expects one ECB rate hike but acknowledges the growing risk of a second hike by year-end.
This is MUFG's forecast, not an official ECB forecast.
According to the interest rate trajectory MUFG incorporates into its FX forecasts, the ECB policy rate is:
Current level — 2.25%.
Q3 2026 — 2.50%.
Q4 2026 — 2.50%.
Q1 2027 — 2.50%.
Q2 2027 — 2.50%.
MUFG also anticipates a gradual decline in the 10Y German Bund yield from 3.32% to 3.00% in Q2 2027.
Eurozone Inflation
The renewed rise in energy prices pushed headline inflation in the Eurozone to 3.3% in August.
The energy component, according to the material, could keep inflation above 3% for the rest of the year and into early 2027.
Particularly important is the replenishment of European gas reserves, which created additional demand for natural gas and contributed to its price increase.
Additionally, the combination of El Niño and high energy costs could cause food price inflation to accelerate towards the end of the year.
A positive factor remains that underlying inflation is relatively stable at around 2.4%, and selling-price expectations have not significantly increased in recent months.
This means that headline inflation and underlying inflation are not moving exactly in the same way.
This difference is what matters to the ECB.
EUR/USD: Difference Between MUFG Forecast and Bloomberg Consensus
As of August 28, EUR/USD was 1.1598.
MUFG Forecast:
Q3 2026 — 1.1500.
Q4 2026 — 1.1800.
Q1 2027 — 1.2000.
Q2 2027 — 1.2000.
Bloomberg consensus:
Q3 2026 — 1.1600.
Q4 2026 — 1.1600.
Q1 2027 — 1.1700.
Q2 2027 — 1.1800.
The source explicitly states that consensus forecasts are sourced from Bloomberg, while the individual currency forecasts provided are MUFG's forecasts.
This is an important distinction.
MUFG effectively forecasts a stronger EUR in 2027 than the Bloomberg consensus.
Inflation until Spring 2027
Headline inflation in the Eurozone could remain above 3% until spring 2027 due to the energy factor.
If this scenario materializes, the ECB may be forced to remain restrictive for longer.
However, if the geopolitical situation in the Middle East improves, the energy premium could decrease.
In such a case, the ECB might have the opportunity not to continue tightening.
Another factor is government bond spreads.
If spreads in countries with high debt burdens widen, financial conditions effectively become tighter even without an additional ECB hike.
That is, sovereign spreads can partially perform the same function as monetary tightening.
United Kingdom: Economy More Resilient Than Expected
The pound also strengthened against the dollar in August.
GBP/USD rose from 1.3465 to 1.3556.
At the same time, against the euro, the pound weakened slightly: EUR/GBP rose from 0.8547 to 0.8556.
The British economy showed 0.4% q/q growth in Q2 after 0.6% in Q1.
This was the best result since the first half of 2024.
Services remained an important factor supporting the economy.
In June, services output rose by 0.4%, and the services PMI in August climbed to 52.8 — the highest level since February.
At the same time, domestic inflationary pressure appeared significantly more subdued.
PAYE employment in July decreased by 13 thousand.
Underlying private-sector wage growth slowed to 2.8% in June.
Excluding the COVID period, this was the weakest indicator since June 2018 and the 16th consecutive month of slowing year-on-year pace.
This creates an interesting combination:
economy holding up → but wage pressure weakening → domestic inflation weakening → need for hike decreasing.
BoE: External Inflation vs. Domestic Inflation
The main problem for the Bank of England is that internal and external factors are moving in different directions.
On the one hand, wage growth is slowing, employment is weakening, and domestically generated inflation is not showing significant acceleration.
On the other hand, the energy shock remains an external inflationary risk.
In July, CPI rose, partly due to a change in the OFGEM utility price cap.
OFGEM also confirmed a further increase of approximately 4% from October, which was close to the BoE's assumptions in its previous inflation projections.
Therefore, the BoE faces the same dilemma as the ECB:
should it react to inflation stemming from an energy shock, or focus on weaker domestic inflationary pressure?
GBP/USD and Interest Rate Spreads
An interesting feature of the pound is that it continued to show strength despite changes in relative yield dynamics.
MUFG notes that, based on EZ-UK 2Y spreads, EUR/GBP should have traded around the 0.8800–0.8900 range, while the actual rate was significantly lower.
For a trader, this is a classic example of a situation where:
FX ≠ only rate differential.
Currency is also influenced by:
capital flows;
positioning;
risk sentiment;
political factors;
current account structure;
trade flows;
assessment of future monetary policy.
Therefore, the spread can be a useful fundamental anchor, but it does not necessarily explain the entire current FX level.
Japan: BoJ moves towards normalization, but there is a fiscal dominance problem
The Japanese yen remains one of the most interesting currencies in the G10.
In August, USD/JPY rose from 159.23 to 160.03.
EUR/JPY increased from 183.26 to 185.60.
At the same time, the BoJ's policy rate remained at 1.00%.
The BoJ continues to reduce JGB purchases by approximately ¥200 billion per quarter until Q1 2027, after which the pace of reduction is expected to cease, and the volume of purchases is expected to fall to approximately ¥2 trillion per month.
This means that the BoJ simultaneously:
raises rates;
reduces the scale of bond purchases;
tries to return to a more normal monetary policy.
But the market questions the speed of this process.
Japanese bond market: 10Y JGB at highs since 1997
The 10-year JGB yield increased by approximately 15 bps in August and closed at 2.96%.
According to the material, this is the highest monthly close level since 1997.
This is an extremely important move for the Japanese market.
On the one hand, a higher JGB yield increases the attractiveness of Japanese assets.
On the other hand, excessive growth in long-term yields can create problems for the government due to the huge national debt.
And this is where the concept of fiscal dominance comes in.
If the central bank cannot raise rates as quickly as inflation demands due to the risk of a sharp increase in the cost of servicing government debt, monetary policy effectively becomes constrained by fiscal position.
BoJ: the market is already pricing in a hike
By the end of August, the OIS market estimated the probability of a BoJ hike in September at approximately 90%.
By mid-2027, market pricing anticipated a policy rate of around 1.75%.
Deputy Governor Himino did not give direct guidance on a hike in his speech, but his tone was hawkish enough to effectively support the existing market pricing.
Therefore, the September hike itself does not necessarily have to be a strong driver for JPY.
If the market already prices it in with a probability of about 90%, a significant part of the information is already in the price.
For a stronger move, a surprise is needed:
either a faster path to a neutral rate,
or a signal of more hikes,
or a sharp change in US-Japan rate differential.
USD/JPY and US-Japan 2Y spread
For USD/JPY, the 2Y rate differential is particularly important.
Simply put:
US 2Y yield − Japan 2Y yield → USD/JPY.
If US yield grows faster:
USD/JPY receives fundamental support.
If Japan yield grows faster:
USD/JPY receives fundamental downward pressure.
That is why a situation where Fed tightening expectations are removed from the American curve potentially creates downward pressure on USD/JPY.
But Japanese factors can limit the scale of such a move.
Japan and fiscal dominance
Japan's problem is not only inflation.
The state has a very high level of debt.
Therefore, raising interest rates increases the cost of servicing the debt.
This creates a potential conflict:
the BoJ may want to normalize rates due to inflation;
but the government is interested in controlled borrowing costs.
If this problem starts to influence the central bank's decisions, fiscal dominance arises.
In such a situation, the market may doubt how far the BoJ can realistically raise rates.
This is one of the reasons why even a hawkish BoJ does not necessarily mean a sharp strengthening of the JPY.
Yen and energy shock
The yen has another structural problem – Japan is a major energy importer.
After the start of the US-Iran conflict, the country used oil reserves, and the energy import bill subsequently began to grow.
In July, the import bill for mineral fuels was approximately 60% higher than the average monthly level from March–May.
For Japan, expensive energy means a larger import bill.
This creates an outflow of funds abroad.
Therefore, an oil shock does not necessarily automatically mean a strong yen even in geopolitical risk-off.
In the specific structure of the Japanese economy, expensive energy sources can act against the JPY through the trade balance.
Energy factor becomes a global FX driver
The Middle East conflict remains one of the central factors for financial markets.
Brent rose only slightly in August, but natural gas showed a much stronger movement.
TTF gas rose by 20% in August, and by approximately 73% since the end of June.
This may be due to supply constraints through the Strait of Hormuz and low European inventory levels.
At the same time, refinery outages related to the Russia-Ukraine conflict exacerbated pressure on diesel prices.
The average price of diesel in Europe has risen by more than 20% since early July and approached April highs.
This is important not only for commodities.
Energy → inflation → central banks → yields → FX.
Trump–Xi: geopolitics and Asian currencies
Another key risk in September is the planned Trump–Xi summit on September 24 in Washington.
Focus areas:
trade;
technological restrictions;
AI cooperation;
geopolitical issues;
policy uncertainty;
risk of further escalation between the US and China.
The MUFG material indicates that a major breakthrough seems unlikely, but improved communication or limited progress on individual issues could support sentiment and be moderately positive for the renminbi and broader Asian FX.
For the currency market, it is important that China's trade policy has an effect far beyond CNY.
It affects:
AUD;
NZD;
KRW;
TWD;
SGD;
commodity currencies;
global risk sentiment.
Australia: RBA and commodity currencies
The Australian dollar remains sensitive to two main factors.
The first is the RBA's domestic monetary policy.
The second is global risk sentiment and China's growth.
AUD/USD therefore cannot be analyzed solely through the US-Australia yield differential.
If China shows weakness, commodities weaken, and global risk sentiment deteriorates, AUD may be under pressure even with a relatively favorable interest rate differential.
Conversely, an improving Chinese economic outlook, stabilizing commodity prices, and a hawkish RBA can simultaneously create support for AUD.
In MUFG's forecast, AUD/USD rises from 0.7166 at the end of August to 0.7400 in Q2 2027.
New Zealand: RBNZ
NZD has a similar dependence on global risk sentiment and China/Asia growth, but RBNZ's own monetary policy also matters.
In the September outlook, the RBNZ is one of the first central banks to hold meetings.
The material notes that a 25 bp hike was almost fully priced in.
This means that the fact of the hike itself may have a limited market impact.
Significantly more important could be:
forward guidance;
assessment of inflation risks;
trajectory of subsequent rates;
NZD's reaction to changes in global yields.
MUFG's forecast sees NZD/USD at 0.5800 in Q3 2026, 0.5900 in Q4, 0.6000 in Q1 2027, and 0.6100 in Q2.
USD/CAD: rate differential and oil
Canada is a particularly interesting case because CAD simultaneously reacts to the interest rate differential and oil prices.
For USD/CAD, one can look at:
US 2Y yield;
Canada 2Y yield;
US-Canada 2Y spread;
oil;
BoC expectations;
Canadian growth.
If US rate expectations rise relative to Canadian expectations, USD/CAD receives support.
If Canada yields grow faster, USD/CAD receives fundamental pressure.
But a strong rise in oil can additionally support CAD through the terms-of-trade channel.
Therefore, for USD/CAD, it is important to separate:
rate differential;
commodity effect;
risk sentiment.
In MUFG's forecast, USD/CAD is 1.4100 in Q3 2026, 1.3900 in Q4, 1.3800 in Q1 2027, and 1.3600 in Q2.
USD/CHF: the role of the Swiss franc
The Swiss franc has a unique specificity.
CHF is simultaneously:
a low-yield currency;
a safe-haven currency;
a currency of a country with a high external position.
Therefore, CHF can strengthen even when the interest rate differential works against it, if global risk sentiment deteriorates.
At the same time, the SNB can react to excessive CHF strengthening, especially if it creates deflationary pressure.
In MUFG's forecast, USD/CHF falls from 0.8086 to 0.7630 in Q2 2027.
Overall G10 map for September
September 2026 effectively becomes a month of synchronous monetary-policy repricing.
RBNZ — September 2.
Bank of Canada — September 2.
ECB — September 10.
FOMC — September 16.
BoE — September 17.
BoJ — September 18.
Norges Bank — September 24.
Riksbank — September 24.
SNB — September 24.
RBA — September 29.
The figures and market expectations in this calendar are data from the provided material.
This means that each decision can change relative pricing.
For example:
Fed hawkish + ECB neutral → USD positive.
Fed hawkish + ECB hawkish → much smaller USD effect.
Fed dovish + ECB hawkish → strong EUR/USD impulse.
Fed dovish + BoJ hawkish → strong downside risk for USD/JPY.
Fed hold + BoE hold + weak UK wages → GBP may lose rate support.
Fed hold + RBA hike → AUD may get a stronger yield differential.
This is the essence of relative monetary policy trading.
September central bank calendar
| Central Bank Date Market Expectation | ||
|---|---|---|
| RBNZ | September 2 | almost fully priced 25 bp hike |
| Bank of Canada | September 2 | meeting |
| ECB | September 10 | 25 bp hike expected |
| Fed | September 16 | over 50–60% pricing for a hike |
| BoE | September 17 | almost fully priced hold |
| BoJ | September 18 | almost fully priced 25 bp hike |
| Norges Bank | September 24 | about 60% pricing for a hike |
| Riksbank | September 24 | meeting |
| SNB | September 24 | meeting |
| RBA | September 29 | about 50% pricing for a hike |
| These expectations are not guaranteed central bank decisions. This is market pricing, as stated in the source. |
MUFG: currency forecast map to Q2 2027
Separately, the material provides MUFG's forecasts for major currencies.
This is MUFG's own forecast, while the consensus in the corresponding tables is sourced from Bloomberg.
DXY
Spot 28.08.2026 — 99.565.
Q3 2026 — 100.190.
Q4 2026 — 98.070.
Q1 2027 — 96.530.
Q2 2027 — 96.200.
In MUFG's forecast, the dollar may initially show stabilization or strengthening, after which the DXY gradually declines to Q2 2027.
USD/JPY
Spot — 160.03.
Q3 2026 — 158.00.
Q4 2026 — 156.00.
Q1 2027 — 154.00.
Q2 2027 — 152.00.
EUR/USD
Spot — 1.1598.
Q3 2026 — 1.1500.
Q4 2026 — 1.1800.
Q1 2027 — 1.2000.
Q2 2027 — 1.2000.
GBP/USD
Spot — 1.3556.
Q3 2026 — 1.3450.
Q4 2026 — 1.3640.
Q1 2027 — 1.3790.
Q2 2027 — 1.3710.
USD/CAD
Spot — 1.3897.
Q3 2026 — 1.4100.
Q4 2026 — 1.3900.
Q1 2027 — 1.3800.
Q2 2027 — 1.3600.
AUD/USD
Spot — 0.7166.
Q3 2026 — 0.7100.
Q4 2026 — 0.7200.
Q1 2027 — 0.7300.
Q2 2027 — 0.7400.
NZD/USD
Spot — 0.5913.
Q3 2026 — 0.5800.
Q4 2026 — 0.5900.
Q1 2027 — 0.6000.
Q2 2027 — 0.6100.
USD/CHF
Spot — 0.8086.
Q3 2026 — 0.8130.
Q4 2026 — 0.7880.
Q1 2027 — 0.7670.
Q2 2027 — 0.7630.
USD/CNY
Spot — 6.7272.
Q3 2026 — 6.7000.
Q4 2026 — 6.6500.
Q1 2027 — 6.6000.
Q2 2027 — 6.6000.
All these values are MUFG's forecasts.
What stands behind MUFG's forecast map
Interestingly, the forecast does not anticipate a sudden collapse of the USD.
On the contrary, for Q3 2026, MUFG projects DXY at 100.19 against a spot of 99.565.
This means the initial stage of the forecast assumes some recovery for the dollar.
After that, DXY declines to 98.07 in Q4, 96.53 in Q1 2027, and 96.20 in Q2 2027.
This aligns with the logic described in the text:
short-term hawkish repricing by the Fed could support the USD;
but in the medium term, the rate differential may cease to favor the US;
other G10 central banks may also remain hawkish;
and American rates may decline.
Under MUFG's assumptions, the US policy rate is expected to remain at 3.63% in Q3 and Q4 2026, after which it will decline to 3.38% in Q1 2027 and 3.13% in Q2 2027.
The 10Y Treasury yield in this same model declines from 4.75% to 4.50% in Q3, 4.38% in Q4, 4.25% in Q1, and 4.13% in Q2.
These are MUFG's assumptions used for their FX forecast, not the official Fed trajectory.
Why 10Y Treasury is more important than the Fed Funds Rate itself for some FX moves
The short-term Fed rate determines the cost of short-term money.
But the 10Y Treasury is much more strongly related to:
mortgage rates;
cost of long-term lending;
equity valuation;
corporate borrowing costs;
term premium;
fiscal expectations;
long-term inflation expectations.
Therefore, a situation where the Fed raises the rate by 25 bp, but the 10Y Treasury falls, may have a much weaker positive effect for the USD than a hike together with a sharp rise in long-term yields.
For FX, this means that policy rate and bond yields cannot be considered the same thing.
Inflation: CPI, PCE, and the role of energy
For the Fed, it is especially important to distinguish headline inflation from underlying inflation.
An energy shock can very quickly push up headline CPI.
But if it does not translate into:
wages;
services inflation;
housing;
core goods;
broader price expectations,
then the central bank may interpret it as a partially external shock.
That is why the market carefully watches not only headline CPI but also the structure of the indicator.
In the current situation, the energy factor complicates the work of G10 central banks, as it simultaneously pressures headline inflation and creates a risk of slowing economic growth.
Risk-off no longer automatically means "buy USD"
The traditional FX model assumes:
risk-off → demand for USD → DXY up.
But the current market structure makes this relationship less direct.
If risk-off arises due to:
US fiscal stress;
Treasury market problems;
concerns about debt sustainability;
declining confidence in the American policy framework,
the USD may not receive the classic safe-haven support.
This is one of the main themes running through the material.
The dollar remains the global reserve currency, but its behavior increasingly depends on the cause of risk-off, not just the fact of deteriorating risk sentiment itself.
Bond market as a leading indicator for FX
That is why the bond market is becoming a central element of macro analysis.
For EUR/USD, one can look at:
US 2Y − German 2Y;
US 10Y − German 10Y;
Fed pricing vs ECB pricing.
For USD/JPY:
US 2Y − Japan 2Y;
US 10Y − Japan 10Y;
BoJ hike expectations;
intervention risk.
For GBP/USD:
US 2Y − UK 2Y;
Fed vs BoE pricing;
energy-driven inflation;
UK wage growth.
For USD/CAD:
US 2Y − Canada 2Y;
Fed vs BoC;
oil;
Canadian growth.
For AUD/USD:
US rate expectations;
RBA expectations;
China growth;
commodity prices;
risk sentiment.
Thus, an FX pair becomes the result of the interaction of several macro factors, rather than an isolated technical chart.
USD/CAD: rate differential as a fundamental anchor
The 2Y US-Canada swap spread represents the difference between the 2-year US and Canadian swap rates:
US 2Y swap rate − Canada 2Y swap rate.
It reflects relative expectations regarding the future trajectory of interest rates.
If US rate expectations rise relative to Canadian expectations:
USD/CAD receives support.
If the differential narrows:
USD/CAD receives fundamental downward pressure.
But if USD/CAD moves much faster than the rate differential, a divergence occurs.
That's when the market might say that USD/CAD is over-extended.
In such a situation, there are two options:
USD/CAD returns to the level justified by the rate spread;
or the rate spread continues to move and catches up with FX.
This is a fundamental example of a mean reversion framework.