The market in early autumn 2026. An overview of forecasts and reports from analytical institutions

The beginning of September 2026 is marked by an unusual combination of factors in the foreign exchange market. On one hand, the US dollar remains a currency with a high nominal yield among key developed economies, and the market sharply revised the probability of a September rate hike after Federal Reserve Chair Kevin Warsh's speech. On the other hand, the very nature of the movement of US bonds is increasingly linked not only to the Fed's monetary policy but also to Washington's fiscal policy, the operations of the US Treasury Department, and concerns about the long-term trajectory of national debt.
In parallel, other G10 central banks are also shifting to a more hawkish rhetoric. The ECB faces a new inflationary risk due to natural gas, the Bank of Japan continues its policy normalization, and the Bank of of England is finding more reasons for a cautious approach to rates amid weaker domestic inflationary pressures.
As a result, September becomes a month in which the foreign exchange market simultaneously receives decisions from almost all key G10 central banks; RBNZ and Bank of Canada meetings fall on September 2, the ECB on September 10, the FOMC on September 16, the BoE on September 17, the BoJ on September 18, Norges Bank, Riksbank, and SNB on September 24, and the RBA on September 29.
This means that the FX market is entering a period where the difference between expectations for interest rates of various central banks becomes one of the main mechanisms 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%, extending the previous trend. Against the euro, the dollar also weakened: EUR/USD rose from 1.1509 to 1.1598 according to 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 decision by the US Treasury Department to increase planned buybacks of long-term Treasury bonds. The announcement of expanded buyback programs initially raised concerns about an artificial lowering of 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, while 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 once again began to support the dollar. 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 brought back some support for the American currency.
This creates a key problem for traders: it's not enough to simply look at the direction of the DXY. One needs to understand why Treasury yields are changing.
If 10Y falls due to expectations of a Fed rate cut, that's one story.
If 10Y falls due to Treasury buybacks, that's another story.
If 10Y rises due to higher inflationary expectations, that's a third story.
If 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 expectation of a pause to risk of a September hike

The most significant change in the September landscape of American monetary policy was Kevin Warsh's speech at Jackson Hole.
Before this, the market estimated the probability of a Fed rate hike in September at around 35%. 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% quickly enough. Additionally, Warsh noted that financial conditions are not sufficiently restrictive.
For the market, this signaled that the Fed is prepared to consider additional policy tightening even at a late stage of the cycle.
But it is important here to separate market pricing from the Fed's actual decision.
At the time of writing, the market was pricing in over 50% probability of a hike, but NFP and CPI reports were still pending 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 strong and inflation does not show sufficient progress towards 2%, the hawkish case for the Fed strengthens.
Therefore, before the September FOMC, the market essentially receives two key filters:
labor market → inflation → Fed pricing → Treasury yields → USD.

Why a September hike may not be a game-changer

The market may be overestimating Warsh's speech as a form of forward guidance. In his opinion, the words of the Fed chair may primarily reflect his focus on "discipline," rather than a ready-made decision on the rate; before the meeting, the market 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 "Fed will hike."
When the market has already priced in a 60% probability of a hike, the fact of a hike itself may have a limited impact on USD if it is already fully reflected in prices.
Then a larger movement may arise not from the decision itself, but from what will be embedded in 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 is why even a hawkish Fed does not necessarily mean a strong dollar.
If at the same time the ECB becomes more hawkish, the BoJ continues to raise rates, the RBA is considering a hike, and Norges Bank is also approaching a hike, the difference between US and foreign yields may not change sufficiently to create a new powerful impetus for the USD.
This point is emphasized in the MUFG material: even if the Fed raises rates, it will not necessarily be a game-changer for the dollar, as other central banks also demonstrate 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 Department increased buybacks, and the policy itself raised questions about how strongly the government is trying to influence the level of long-term yields.
The problem is that long-term Treasury yields are determined not only by the Fed's rate.
In a simplified form:
10Y Treasury yield ≈ expectations of short-term rates + term premium + inflation expectations + fiscal risk + supply/demand for Treasuries.
Therefore, the Fed can control the short end of the curve much more directly than 10Y or 30Y.
It is for this reason that attempts to influence long-term yields through Treasury operations attract such attention.
The market may ask:
Is this ordinary 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 exclusively in accordance with inflation and the economic cycle.
For USD, this is especially important because 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 the volatile contribution from Ireland, the economy has shown 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 almost 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 government finances deteriorate, investors may demand a higher risk premium for government bonds.
The spread widens.
The cost of financing increases.
Financial conditions tighten.
And the currency market assesses whether the respective country is capable of maintaining a stable macro policy mix.

European growth: why Q3 started better

Judging by sentiment indicators, the third quarter started quite positively.
PMI and European Commission sentiment indicators rose in July and August.
Also, the employment expectations index improved for the second consecutive month.
This was reflected in a decrease in unemployment expectations among European households.
This factor potentially supports consumption in the second half of the year.
However, there were also negative factors.
An unusually warm summer could have taken away some economic activity in the third quarter.
In Germany, for example, low water levels on the Rhine created problems for supply chains.
Provided there is no new escalation of the conflict in the Middle East, the authors of the material consider the underlying growth trend positive.
After revising Q1 GDP upwards and a stronger-than-expected Q2 result, the material upgraded the Eurozone growth forecast for 2026 to 0.8%.
For 2027, growth of 1.3% was expected.
This is a forecast from the provided material, not actual data. It should be attributed to the authors of the original forecast.

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 particularly important at a time when the government must conduct budget negotiations and find 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 challenging.
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 increases, it may 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 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 essentially recovered its previous decline.
This is important because EUR/USD increasingly depends not only on USD weakness but also on whether its own European growth story is forming.
If EUR merely rises due to a weak USD, the movement may be less sustainable.
If European economic data improves and the ECB becomes more hawkish simultaneously, 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 in August rose by approximately 20%, and from late June lows by about 73%.
Gas prices exceed the assumptions used by the BoE and ECB in their assessments.
In Germany, gas storage levels on August 24 were about 63% of capacity, compared to a five-year average of about 81%.
German gas network operators indicated that the winter storage target is virtually 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 be both inflationary and negative for growth at the same time.
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 the backdrop of more sustained growth and elevated energy risks, the market almost fully priced in a rate hike in September.
The stance of ECB Executive Board member Isabel Schnabel was separately noted, as she emphasized the need to react to upside inflation risks.
MUFG in this material expects one ECB rate hike but acknowledges the growing risk of a second hike by the end of the year.
This is MUFG's forecast, not an official ECB forecast.
According to the interest rate trajectory that MUFG assumes in its FX forecasts, the ECB policy rate will be:
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

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 that case, the ECB might get the opportunity not to continue tightening.
Another factor is government bond spreads.
If spreads in highly indebted countries 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.

Great Britain: 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 growth of 0.4% q/q 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 grew by 0.4%, and the services PMI in August rose 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 figure since June 2018 and the 16th consecutive month of slowing annual pace.
This creates an interesting combination:
economy holding up → but wage pressure weakening → domestic inflation weakening → need for hike decreasing.

BoE: External vs. Internal 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 the energy shock, or focus on weaker internal inflationary pressures?

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 zone, whereas 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 affected 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 Fiscal Dominance is a 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 rose from 183.26 to 185.60.
Meanwhile, 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 is simultaneously:
raising rates;
reducing the scale of bond purchases;
trying to return to a more normal monetary policy.
But the market questions the speed of this process.

Japanese Bond Market: 10Y JGB at 1997 Highs

The 10-year JGB yield rose by approximately 15 bps in August and closed at 2.96%.
According to the material, this is the highest monthly close 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, an excessive rise in long-term yields could create problems for the government due to its enormous national debt.
And this is where the concept of fiscal dominance comes in.
If a 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: Market Already Prices in a Hike

At the end of August, the OIS market estimated the probability of a BoJ hike in September at approximately 90%.
By mid-2027, market pricing implied a policy rate of about 1.75%.
Deputy Governor Himino, in his speech, did not give direct guidance on a hike, but his tone was hawkish enough to effectively support existing market pricing.
Therefore, a September hike itself does not necessarily have to be a strong JPY driver.
If the market already prices it with a probability of about 90%, a significant portion 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 for more hikes,
or a sharp change in the 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 may limit the scale of such a move.

Japan and Fiscal Dominance

Japan's problem is not just inflation.
The state has a very high level of debt.
Therefore, raising interest rates increases the cost of debt servicing.
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 begins to affect central bank decisions, fiscal dominance arises.
In such a situation, the market may doubt how far the BoJ can realistically raise rates.
This is one reason why even a hawkish BoJ does not necessarily mean a sharp strengthening of the JPY.

Yen and the Energy Shock

The yen has another structural problem — Japan is a large energy importer.
After the start of the US-Iran conflict, the country used oil reserves, and the energy import bill subsequently began to rise.
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 a geopolitical risk-off scenario.
In the specific structure of the Japanese economy, expensive energy 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 move.
TTF gas rose by 20% in August, and by approximately 73% since the end of June.
This could be due to supply restrictions through the Strait of Hormuz and low European reserves.
At the same time, refinery outages related to the Russia-Ukraine conflict have exacerbated pressure on diesel prices.
The average price of diesel in Europe has risen by more than 20% since the beginning of July and is approaching April highs.
This is important not only for commodities.
Energy → inflation → central banks → yields → FX.

Trump–Xi: Geopolitics and Asian Currencies

Another key risk for September is the planned Trump–Xi summit on September 24 in Washington.
The focus will be on:
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 specific issues could support sentiment and be moderately positive for the renminbi and broader Asian FX.
For the foreign exchange 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 internal monetary policy.
The second is global risk sentiment and China 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 improvement in China's economic outlook, stabilization of commodity prices, and a hawkish RBA could simultaneously provide 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 the RBNZ's own monetary policy also matters.
In the September picture, the RBNZ is one of the first central banks to hold a meeting.
The material notes that a 25 bp hike was almost fully priced in.
This means that 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 reaction to changes in global yields.
MUFG in its 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 downward pressure.
But a strong increase 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: Role of the Swiss Franc

The Swiss franc has a separate specificity.
CHF is simultaneously:
a low-yield currency;
a safe-haven currency;
the 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 declines 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	around 60% pricing for a hike
Riksbank	September 24	meeting
SNB	September 24	meeting
RBA	September 29	around 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 forecast, while consensus in the relevant 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 Lies Behind MUFG's Forecast Map

Interestingly, the forecast does not predict a sudden collapse of the USD.
On the contrary, for Q3 2026, MUFG projects DXY at 100.19 against a spot of 99.565.
That is, the initial stage of the forecast assumes some recovery of the dollar.
After that, DXY falls to 98.07 in Q4, 96.53 in Q1 2027, and 96.20 in Q2 2027.
This corresponds to 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 move in favor of the US;
other G10 central banks may also remain hawkish;
and US 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 fall to 3.38% in Q1 2027 and 3.13% in Q2 2027.
The 10Y Treasury yield in this same model falls 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 an official Fed trajectory.

Why 10Y Treasury is More Important Than the Fed Funds Rate Itself for Some FX Movements

The short-term Fed rate determines the cost of short-term money.
But the 10Y Treasury is much more strongly connected with:
mortgage rates;
the 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 the policy rate and bond yields cannot be treated as the same thing.

Inflation: CPI, PCE, and the Role of Energy

It is especially important for the Fed to separate 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 treat 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;
debt sustainability concerns;
declining confidence in the American policy framework,
the USD may not receive 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 on the fact of worsening risk sentiment.

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, and not an isolated technical chart.

USD/CAD: rate differential as a fundamental anchor

The 2Y US-Canada swap spread represents the difference between US and Canadian 2-year 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 experiences 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 the mean reversion framework.