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Monthly Foreign Exchange Outlook

DEREK HALPENNY
Head of Research, Global Markets EMEA and International Securities

Global Markets Research
Global Markets Division for EMEA
E: derek.halpenny@uk.mufg.jp

LEE HARDMAN
Senior Currency Analyst

Global Markets Research
Global Markets Division for EMEA
E: lee.hardman@uk.mufg.jp

LIN LI
Head of Global Markets Research Asia

Global Markets Research
Global Markets Division for Asia
E: lin_li@hk.mufg.jp

KHANG SEK LEE
Associate

Global Markets Research
Global Markets Division for Asia
E: khangsek_lee@hk.mufg.jp

MICHAEL WAN
Senior Currency Analyst

Global Markets Research
Global Markets Division for Asia
E: ｍichael_wan@sg.mufg.jp

LLOYD CHAN
Senior Currency Analyst

Global Markets Research
Global Markets Division for Asia
E: lloyd_chan@sg.mufg.jp

SOOJIN KIM
Analyst, ESG and Emerging Markets Research – EMEA

DIFC Branch – Dubai
E: soojin.kim@ae.mufg.jp

_{MUFG Bank, Ltd.
A member of MUFG, a global financial group}

April 2026

KEY EVENTS IN THE MONTH AHEAD

1) MIDDLE EAST CONFLICT RISKS RISING

In our March Foreign Exchange Outlook publication we assumed a conflict in the Middle East that would last weeks rather than months. That’s becoming less likely now and the longer the conflict drags on the bigger the risks of more severe financial market conditions. Brent crude oil closed 44% higher in March, and we would have assumed such a large increase would have triggered a larger appreciation of the US dollar. The surge in yields outside of the US has played a role in diluting the gain for the US dollar as has the lack of risk aversion – the VIX index only broke above the 30-level toward month-end. Natural gas prices have also surged in Europe but are close to unchanged in the US. Our worst-case scenario assumed a range of Brent crude oil of USD 120-160pbl for a period of a month or longer and that scenario looks more likely the longer the Strait of Hormuz remains closed. There are also increasing episodes of energy production facilities in the region being attacked that will only prolong the supply impact. In a more severe scenario we would expect global equities to suffer bigger losses as global recession risks increase. This would likely lead to a further strengthening of the US dollar with DXY potentially trading higher up to the 103/104-level. The coming month will either see this scenario start to play out or we see a more concerted effort to de-escalate. The US could de-escalate in two-to-three weeks, as has now been indicated by President Trump but whether Iran then decides to reopen the Strait of Hormuz will be key to a reversal away from the severe scenario that incorporates the higher crude oil price range.

2) CENTRAL BANK MEETINGS TO REVEAL THINKING

Six G10 central bank meetings take place in April with the RBNZ first up on 8th April. There’s quite a gap then until the BoJ announces its decision on 28th April followed by the BoC and the Fed on 29th and then the BoE and ECB on 30th. Pricing for the RBNZ is close to flat and an unchanged policy announcement is likely. The Fed and the BoC will likely also stay on hold. The uncertainties will lie around the other three meetings. We expect the BoJ to raise rates by 25bps to 1.00% assuming there has not been a major risk-off (equities -20% or more) given the BoJ communications have signalled an appetite for acting. The BoE has time before having to respond and hence we expect the BoE to stay on hold. The ECB decision is a close call but based on President Lagarde’s speech on 24th March we are assuming the ECB will act and hike by 25bps to send a strong message to the markets on fighting inflation

3) IMPLEMENTATION OF POLICIES ANNOUNCED IN MARCH NPC

Based on the directions established during the 'Two Sessions' in March, policy implementations in April will be the focus. 'Precise and Effective' Monetary Policy may imply some easing through targeted open market operations in April. Specific implementation rules for fiscal subsidies are to be rolled out too, covering various “trade-in” programs. RMB has been resilient, however against the backdrop of largely an increase in the risk premium for the oil prices, rather than market participants’ pricing-in a significant supply shortage. The latter would generate more severe negative impact on production and consumption.

Forecast rates against the US dollar - End-Q2 2026 to End-Q1 2027

Notes: All FX rates are expressed as units of currency per US dollar bar EUR, GBP, AUD and NZD which are expressed as dollars per unit of currency. Data source spot close; Bloomberg closing rate as of 4:30pm London time, except VND which is local onshore closing rate. All consensus forecasts are Bloomberg sourced.

US dollar

MARKET UPDATE

In March the US dollar strengthened notably against the euro in terms of London closing rates, from 1.1818 to 1.1524. The dollar strengthened by less against the yen, from 156.05 to 159.00. The FOMC at its meeting in March kept the range for the federal funds unchanged at 3.75%-4.00%. The FOMC confirmed the end of QT effective December last year with the Fed no longer reducing UST bond holdings by USD 5bn per month. MBS holdings would continue to decline but would be offset by buying of US T-bills, initially amounting to around USD 40bn per month.

OUTLOOK

The US dollar, on a DXY basis, advanced in March by 2.4%. The start of the conflict in the Middle East resulted in a surge in energy prices with Brent crude oil up 44% at the end of March and TTF natural gas up 59%. The daily correlation on a 1-month rolling basis between the percentage change in crude oil and the dollar has strengthened notably although the scale of US dollar strength is a little less than would have been expected based on our regression analysis of previous oil price spikes over the post-shale oil period (since 2012) which indicates that the US dollar should be stronger. Hope of peace may be playing a role here with FX responding to President Trump’s comments that peace negotiations have begun.

The terms of trade driver of FX was not that apparent in G10 FX performance in March with intervention threat and yield playing a role. After the USD, JPY, GBP and NOK are three of the best performing G10 currencies. But the scale of depreciation versus the US dollar is likely being limited by concerns over the health of the US economy. The 92k drop in NFP in February highlights the fragility of the US economy and will limit terms of trade benefits. The average retail gasoline price has surged 34% since the crisis began, which will drag on consumer confidence and spending. Furthermore, investors are likely confused over the strategic goals with the White House communicating different goals and no clear strategy that could ultimately undermine confidence in US assets over time. The suggestion at the end of March of US de-escalation without a clear resolution to the Strait of Hormuz and possibly without a deal with Iran and the regime left intact we believe will likely reinforce the potential for a further loss of confidence in US assets.  

In a severe scenario, the conflict drags on and attacks on energy production infrastructure increase in scale which extends the timeline of supply disruption. Brent crude oil could then trade in a higher range of USD 120-160p/bl that results in increased risks of global recession. Equity markets fall more sharply and the ToT and yield dynamic impacting FX fades and there is a stronger initial flight to the US dollar. The DXY in this scenario could extend higher up to the 105-level. In a scenario that at the time of writing is becoming more plausible, a half-hearted de-escalation with uncertainties persisting over the Strait of Hormuz and instability in the Middle East will undermine confidence in the US and hence in US assets and the dollar.

INTEREST RATE OUTLOOK

* Interest rate assumptions incorporated into MUFG foreign exchange forecasts.

Given the high uncertainty, a scenario based framework is the most appropriate lens to analyze the macro situation. In the best-case, a quick resolution to the war and the reopening of the Strait of Hormuz would allow oil prices to drift down toward pre-conflict levels ($50-$75). If the labor market shows signs of stabilizing, it could delay or reduce the total amount of rate cuts. Our base case is more pessimistic and assumes a longer conflict (a series of ceasefires/negotiations) with oil hovering in the $75-$100 range. This would likely offset some or most of the Q1 boost from OBBBA related tax refunds, softening the growth outlook and making unemployment risks outweigh inflation risks. As long as inflation expectations remain anchored with oil below $100, the Fed should see past the oil driven supply shock and begin normalizing policy, thus we keep our three cuts, starting in July. In the worst-case, oil prices hold above $100 and become a significant macro headwind, tightening financial conditions as equities reprice to weaker earnings. Oil this high would initially create a stagflationary shock that could evolve into a recession risk, particularly if private credit markets continue to deteriorate in the background.

 (George Goncalves)

ROLLING 1‑MONTH CORRELATION: DXY VS OIL

Source: Bloomberg, Macrobond & MUFG GMR

DOLLAR INDEX VS SHORT-TERM YIELD DIFFERENTIAL

Source: Bloomberg, Macrobond & MUFG GMR

Japanese yen

MARKET UPDATE

In March the yen weakened further versus the US dollar in terms of London closing rates from 156.05 to 159.00. However, the yen strengthened versus the euro from 184.42 to 183.23. The BoJ at its meeting in March kept the key policy rate unchanged at 0.75%, following the 25bp hike in December, the second 25bp rate hike since 2007. The BoJ is also continuing with the policy of cutting JGB monthly purchases and as was previously announced, the pace of reduction was reduced from JPY 400bn per quarter to JPY 200bn per quarter effective from April.

OUTLOOK

The yen weakened in March fuelled by the surge in energy prices in response to the Middle East conflict that is set to result in a widening energy trade deficit and a potential inflation spike that results in a decline in real yields. Japan relies heavily on energy imports from the Middle East and the closure of the Strait of Hormuz will severely impact Japan’s ability to weather the negative terms of trade shock. Over a two-year period from March 2021 to March 2023 Japan’s energy deficit on a 12mth rolling sum basis increased from JPY 10trn to JPY 33trn, the fastest expansion over a two-year period on record. However, the terms of trade shock could well be less this time, assuming the supply constraint does not last many months. Japan has announced the release of 80mn barrels from its Strategic Petroleum Reserve as part of the OECD-agreed 400mn barrel release. The Japan total is the largest amount released after the US. The government is also lowering the mandatory private sector minimum stockpile from 70-days’ worth to 55-days. The total drawdown equates to around 50 days’ worth of total Japan consumption of crude oil and the SPR release equates to about 20% of the total SPR volume. As a comparison, in 2022 Japan released just 7.5mn barrels. So we do not expect the ToT shock to be as negative for the yen as in 2022 while we also see potential upside yen risks if broader financial market dynamics change and equity markets fall more sharply on global growth fears. Then global yields will likely start to fall, in turn providing yen support.

It is also looking increasingly likely that the BoJ’s stance in regard to this energy shock will be different. In 2022-23 the BoJ did not alter its monetary stance as global central banks were hiking aggressively. Now, BoJ communication looks to be preparing the market for a hike – we expect the BoJ to hike on 28^th April. Governor Ueda, in the Diet in March, spoke of the need to potentially act to help anchor long-term yields while the Summary of Opinions from the March meeting contained numerous hawkish references on the need to hike the policy rate in order to ensure inflation expectations remains under control. 

The BoJ also referenced yen weakness as a factor in hiking rates. While further dollar strength in general could see USD/JPY trading back above the 160-level, we see BoJ action, the possibility of MoF intervention and a more modest ToT energy shock as factors that will see a gradual move lower in USD/JPY going forward.

INTEREST RATE OUTLOOK

* Interest rate assumptions incorporated into MUFG foreign exchange forecasts.

Like elsewhere, the 10-year JGB yield increased notably in March, by 23bps to close at 2.35%. The 10-year yield closed at 2.39% on 27th March, the highest closing rate since 1997. The combination of a weaker yen, higher energy prices and still an accommodative monetary stance combined to put upward pressure on longer-term yields. Fiscal uncertainties have also increased with expectations that the government could be forced to increase its cost of living support measures in order to counter the latest surge in energy prices. However, we suspect longer-term yields can stabilise and move higher from here in an orderly fashion, albeit with risks of temporary bouts of volatility. The BoJ’s monetary stance will be crucial and assuming our view is correct and we see an April rate hike followed by another in Q4 then fears over the BoJ behing behind the curve and running an excessively loose monetary stance should diminish. We also see scope for yen appreciation with a potential help from intervention, if over the short-term the MoF is forced to intervene. A gradual further rise in 10-year yields seems likely.

USD/JPY VS. RATIO OF US/JAPAN TERMS OF TRADE

Source: Bloomberg & MUFG GMR

USDJPY FX REGRESSION MODELLING BETAS (2YR ROLLING)

Source: Bloomberg, Macrobond & MUFG GMR

Euro

MARKET UPDATE

In March the euro weakened against the US dollar in terms of London closing rates from 1.1818 to 1.1524. The ECB at its meeting in March left the deposit rate unchanged at 2.00% - the level reached following 100bps last year. The cumulative easing amounted to 200bps over 2024-25. QT will continue this year with the ECB’s projected maturities from both APP and PEPP expected to result in a EUR 500bn reduction in balance sheet holdings.

OUTLOOK

The euro weakened in March in response to the start of the conflict in the Middle East that resulted in the price of Brent crude oil surging 44% in March. TTF natural gas front contract jumped by 59% - a more modest rise than what happened following the Russia invasion of Ukraine in 2022. The drop in EUR/USD has been a little less than what we would have assumed based on the crude oil increase but EUR/USD would likely drop further on a further escalation in the conflict that would likely then result in global investors reappraising the energy supply outlook and hence the potential hit to global growth. At the time of writing, investors have turned optimistic again on expectations of US de-escalation which we believe could see confidence in US assets return as a theme more quickly than we had assumed. The fact that the euro drop has been more modest than we would have expected (based on the crude oil rise we would have assumed around a 3% drop in EUR/USD) is partly explained by the surge in front-end yields in the euro-zone. The ECB rhetoric so far in response to the crisis indicates a very different reaction function to the energy price surge with focus on upside inflation risks. ECB President Lagarde stated that the ECB could act in a “forceful” way to a more severe energy price surge.

We currently see scope for the ECB to hike rates on two occasions in response to the increased inflation risks stemming from higher energy prices. The ECB rhetoric has been very clear and there seems to be widespread support for not repeating the errors of 2022. Hiking twice can help send a message to the markets that the ECB is not willing to “look through” the inflation shock. At the time of writing two-to-three hikes are priced for 2026 which we believe in circumstances of weaker equity market performance and decelerating growth is unlikely to be delivered. But early signs of inflation feeding through means the ECB will have to act. The flash CPI estimate for March saw a 1.2% MoM increase, the largest since 2022. The flash composite PMI for input prices jumped 6.9pts in March, the second largest increase on record – surpassed only once in March 2022 following Russia’s invasion of Ukraine.

De-escalation is becoming more complicated but ultimately we see de-escalation over the coming month or so that sees EUR/USD start to recover from lower levels – we could see EUR/USD fall to as low as the 1.1000-level. However, a de-escalation now that leaves many questions unanswered (like passage via the Strait of Hormuz) will see renewed EUR/USD buying, possibly to levels beyond our current forecasts

INTEREST RATE OUTLOOK

* Interest rate assumptions incorporated into MUFG foreign exchange forecasts.

The 10-year German bund yield surged in March, by 36bps to close at 3.00%, the highest close since June 2011. The jump reflects investor concerns over inflation risks stemming from the conflict in the Middle East and given crude oil prices can stay elevated for potentially another few months, the risks to inflation are considerable. Based on a more severe scenario of crude oil prices remaining at levels around USD 140pbl for between a month or two, the headline annual CPI rate is likely to head to a rate close to 6.0% by around the end of the year. The ECB is unlikely to tolerate that prospect without a monetary response, and even assuming a less severe scenario, we currently expect the policy rate is raised by 25bps twice – in April and June. Crude oil prices are currently up around 45% which if sustained will lead to a jump in inflation requiring action. The OIS market show two-to-three rate hikes but we see growth concerns reducing the need for the extent of tightening currently priced. Monetary tightneing should help contain the longer-end of the yield curve and curve flattening is most likely. Still, we have raised our 10-year yield levels although we see yields decline further out as inflation fears recede.

ECB VS FED POLICY EXPECTATIONS FOR YEAR AHEAD

Source: : Bloomberg, Macrobond & MUFG GMR

EUR/USD VS TTF NATURAL GAS (FRONT MONTH)

Source:: Bloomberg, Macrobond & MUFG GMR

Pound Sterling

MARKET UPDATE

In March the pound weakened versus the dollar in terms of London closing rates, moving from 1.3460 to 1.3203. However, the pound strengthened against the euro from 0.8780 to 0.8728. The MPC at its meeting in March left the key policy rate was unchanged at 3.75%, after six 25bp cuts since August 2024.

OUTLOOK

After the US dollar, the pound was the second best performing G10 currency in March with the Middle East conflict and energy price surge triggering a huge jump in yields in the UK. The yield response is quite different to before. In Feb 2022 following the Russia invasion of Ukraine, the 2-year Gilt yield fell 70bps initially and the 2-year yield did not breach the level just prior to the invasion until mid-April 2022. This time, the 2-year yield surged and closed March at 4.41%, some 88bps higher than the Feb close before the conflict began. The BoE meeting in March certainly reinforced the move with a clear shift in tone to signal the potential for a hike. But we are not convinced this relatively strong pound performance will persist. Near-term, global growth risks are set to intensify and investor focus could soon shift away from upside inflation risks to downside growth risks. In those circumstances, yield is unlikely to play much supportive role for currencies. In addition, the UK finds itself more vulnerable to energy shortages that could undermine the growth outlook. The UK closed two fuel refineries in 2025 and now have only four in operation. UK refineries are also tailored toward light crude oils that does not align with the mix required in the market and hence the UK imports nearly GBP 18bn worth of refined petroleum, one of the top UK imported products. 40% of refined product imports are diesel with 33% jet fuel. Even a US-orchestrated de-escalation is unlikely to alleviate the supply uncertainties with numerous uncertainties set to persist for some period of time.

The surge in front-end yields in March in the UK is probably excessive and we are dubious of the pricing that at one stage in March implied the BoE would deliver four 25bp rate hikes. The BoE was priced for two rate cuts before the conflict. This swing is unjustified in our view and while this has partially reversed, the OIS pricing at end-March still implied two rate hikes. We see the BoE delivering one, with a risk of two depending on broader market conditions. The BoE monetary stance is already restrictive with the economic backdrop mixed and hence the BoE has more time to assess the inflation risks. MPC member Alan Taylor, one of the most dovish members stated in March that the “high bar for a rate hike could be surpassed” but also played down the need for extensive action. The 5y5y inflation swap has jumped only by about 10bps since the conflict began.

We are unconvinced that the yield support for the pound will continue and suspect either a more intense period of risk-off as global equity markets fall or de-escalation that will see yields decline further. Either way, the period ahead could see a reversal of the outperformance of the pound within the G10 space.

INTEREST RATE OUTLOOK

* Interest rate assumptions incorporated into MUFG foreign exchange forecasts.

The 10-year Gilt yield surged in March, by 69bps to close at 4.92%. The move higher in the UST bond 10-year yield was 38bps while the German bund yield jumped by 36bps underlining the much larger jump in UK yields. We see this as overdone but investors remain more sensitive of UK inflation and fiscal risks that sees this type of reaction. There is some logic to the investor reaction with inflation and wages more sticky in the UK than in Europe or the US. The PMI Composite Input Prices Index did jump sharply in March, by 6.1pts, the second largest increase on record – only surpassed once in October 2016 following the plunge of the pound after the Brexit referendum. However, the policy stance in the UK is already restrictive and hence the MPC is in a better position to assess the balance of risks to inflation versus growth. Some of the MPC members also appeared to suggest a pragmatic approach to decision-making ahead. Deputy Governor Breeden suggested a lower risk of inflation pass-through given the different macro backdrop while Megan Greene (strong hawk) indicated time would be required to assess the risks. So we see scope for yields to retrace and expect a more contained BoE response to the conflict.

EUR/GBP vs SHORT-TERM YIELD SPREAD

Source: : Bloomberg, Macrobond & MUFG GMR

GBP/USD FX REGRESSION MODELLING BETAS (2YR ROLLING)

Source: : Bloomberg, Macrobond & MUFG GMR

Chinese renminbi

MARKET UPDATE

In March, USD/CNY moved from 6.8616 to 6.8975. On 20^th March, the PBoC kept the 1Y and 5Y LPRs unchanged. On 22^nd March, the PBoC governor Pan said that the bank will maintain a supportive monetary policy stance and continue to implement a moderately loose monetary policy at the annual China Development Forum.

OUTLOOK

The data released indicates a positive start of the Chinese economy in 2026. In the first two months of 2026, exports were stronger than what seasonality would suggest and provided support for IP performance, whereas domestic demand remained soft dragged by continued property downturn due to household’s continued deleveraging. There were three highlights from recent data release: First, government’s push on stimulating construction activities started to work out as infrastructure FAI growth rebounded from -2.2% in 2025 to 11.4%yoy for Jan-Feb period, flipping overall FAI growth back to positive territory. Secondly, high-tech products demand both locally and abroad continued to support IP and exports growth, and China’s dominance in sophisticated supply chains means this growth trend will likely remain. Third, the official PMI readings for March showed China’s activities actually improved against the backdrop of Middle East conflict, with manufacturing PMI rebounded to 50.4 due to expansionary new orders and production. Signs of inflation emerged, with the main raw material input prices sub-index surging by 9.1ppts to 63.9, and the PPI sub-index rose by 4.8ppts to 55.4. This suggests strong imported inflation at the producer level, but the pass-through could be relatively modest to consumers given weak demand. Beyond the data release, the key takeaway from the March NPC is the government’s stance is turning more pragmatic towards growth with economic rebalancing and fiscal risk management top priorities, beyond the cyclical short-term cycles.  

China’s relatively low dependency on external energy has solidified its resilience amid the energy price shock and intensified global volatility across financial markets. Since the war on Iran began, CNY outperformed its Asian peers with only 0.5% depreciation amidst a 2.4% US dollar gain, CSI 300’s much less drop and a stable 10-year CGB yield. Looking ahead, with our assumptions of some further escalation in Middle-East conflict before de-escalation in May and June, our oil price assumptions are that average quarterly oil price increases from Q1's 78 USD per barrel to 90, and average oil price in April reaches 115, higher than March average’s 100, before oil price declines to year-end price of 75. With these, we expect USD/CNY to move higher in April, before decline to 6.85 by Q2 quarter-end. The risk for our call exists, due to the highly uncertain nature of this conflict. A prolonged Middle East conflict and severe drop in supply for extended period of time would translate into more severe damage to China’s real economy and RMB. In a less severe situation, one factor, asset diversification demand for “safer” assets, might help provide support for CNY, especially for capital flowing out of the Middle-East.

INTEREST RATE OUTLOOK

* Interest rate assumptions incorporated into MUFG foreign exchange forecasts.

China’s bond market seemed largely isolated from the sell-off in global bonds markets in March. The curve steepened with yields declining in the front-end by 8-10bps whereas the yields in the longer-end either flattened or edged upward by only a few bps. The movement in short-end rates suggests that market saw monetary policy easing as a tool to buffer against downside growth risk post the March NPC and Governor Pan’s remarks at the annual China Development Forum, as compared to an aggressive fiscal expansion. This is in line with our view that monetary policy needs to act to support growth, especially amid rising external negative shocks. On the other hand, the muted response in longer-end yields suggests global investors’ possible growing diversification demand for China’s bonds offsetting the inflation prospect from surging energy prices. Net, we think the 10-year CGB yield has modest upside given improved inflation outlook and ongoing structural rebalancing, barring a severe China growth slow-down triggered by a prolonged Middle East conflict. Policy easing wise, we should expect more of it in Q3 (-20bps) than in Q2 (-10bps) when front-loaded fiscal support starts to fade in 2H.

IN ASIA, CNY OUTPERFORMED WITH KRW, THB AND PHP UNDER PRESSURE

Source: : Bloomberg, MUFG GMR

CHINA GOVERNMENT BOND YIELD CURVE STEEPENED IN MARCH

Source: : Bloomberg, MUFG GMR

For other currencies outlooks, please download the PDF version attached at the top of this page.