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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}

December 2025

KEY EVENTS IN THE MONTH AHEAD

1) FED TO DELIVER HAWKISH RATE CUT

We expect the Fed to deliver a third consecutive rate cut at the upcoming FOMC meeting on 10th December. However, the decision remains finely balanced. Fed Chair Jerome Powell has emphasized that a further reduction is “not a foregone conclusion, far from it.” Uncertainty surrounding the health of the US economy has deepened due the recent record-length government shutdown, adding to the ambiguity over the Fed’s next move. The Bureau of Labor Statistics has confirmed that the release of the November nonfarm payrolls report will be delayed until 16th December, after the next FOMC meeting. The Fed has suggested that this “data fog” argues for greater caution in December. While the delayed September payrolls report was not weak enough, in our view, to justify another cut, subsequent comments from New York Fed President Williams—stating that the Fed still has room to cut rates “in the near term”—have tipped the balance toward another reduction. That said, any additional cut is likely to face increased opposition from hawkish members of the FOMC, potentially setting the stage for a pause in Q1 and limiting further USD weakness. Our outlook for continued USD depreciation next year could gain support if President Trump appoints Kevin Hassett as the next Fed Chair, with a decision expected before Christmas.

2) BOJ TO RESUME RATE HIKES ENCOURAGED BY WEAKER JPY

We expect the BoJ to resume rate hikes at its upcoming policy meeting on 19th December. Our view was reinforced today by comments from BoJ Governor Ueda, who stated that the Bank “will consider the pros and cons of raising the policy rate and make decisions as appropriate” at the next meeting. This marks the strongest signal yet that rates are likely to be raised for the first time since January. The remarks follow “frank, good discussions” during last month’s face-to-face meeting with the prime minister and economic ministers, who appear to have given the green light for another rate hike. Tightening monetary policy should help provide more support for the JPY, which has weakened sharply since Sanae Takaichi won the LDP leadership election and became prime minister. The likelihood of intervention to support the JPY will continue to grow if a BoJ rate hike fails to reverse the recent weakening trend.

3) CHINA’S KEY ECONOMIC PRIORITIES FOR 2026 TO BE LAID OUT

The annual Central Economic Work Conference, scheduled for December, will review this year’s economic performance and outline priorities for the year ahead. Boosting consumption and advancing efforts to develop new, high-quality productive forces are expected to remain top objectives. Next year marks a significant milestone—the first year of the 15th Five-Year Plan—so the conference may also provide signals on long-term structural strategies. Recent downward pressure on the economy, particularly on domestic demand, has intensified, making this year’s.

Forecast rates against the US dollar - End-Q1 to End-Q4 2026

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 November the US dollar weakened modestly against the euro in terms of London closing rates, from 1.1537 to 1.1600. However, the dollar gained against the yen, from 154.06 to 156.15. The FOMC did not meet in November and hence the range for the federal funds was unchanged at 3.75%-4.00%. The FOMC confirmed the end of QT effective 1^st December 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.

OUTLOOK

The US dollar weakened modestly in November with the DXY index down a marginal 0.4% with dollar weakness versus the euro nearly fully offset by the gain versus the yen. The softening of the dollar was more modest than we anticipated which now makes our previous year-end target of 1.2000 for EUR/USD unrealistic. We have lowered our forecast profile as a result. We still expect the dollar to weaken though and there are a number of events on the horizon that we think will serve to undermine the dollar. Firstly, the delayed jobs data for October will be released with the November data after the FOMC meeting and we expect the data to confirm continued labour market weakness. Secondly, Treasury Secretary Scott Bessent has indicated an announcement on who will be the new Fed Chair will be made before Christmas. Kevin Hassett is the favourite and if confirmed would reinforce expectations of a more aggressive approach by the Trump administration to make fundamental change at the Fed and increase pressure on the FOMC for lower rates. Whether successful or not, it will likely fuel expectations and undermine confidence. Thirdly, we may get a Supreme Court ruling on the legality of using IEEPA for reciprocal tariffs. A ruling against is likely which will create renewed global trade uncertainty and fiscal uncertainty over the revenue earning scope of tariffs.

The market is now close to fully priced for a rate cut from the FOMC in December and hence the communication on policy ahead will be key for rates and the dollar. Given the FOMC appears more divided than usual a cut is very likely to coincide with cautious guidance on future moves. We assume three cuts next year, which is a little less than what is currently priced but if the labour market deteriorates further it’s likely that we will see market rates move to price in further cuts that would be the catalyst for renewed depreciation. US equity market performance is an additional risk for 2026. The S&P 500 has advanced 80% in the near three-year period since the end of 2022 and a larger correction lower is becoming a bigger risk. That would also open up scope for the Fed to cut more than expected.   

We have lifted our US dollar forecast levels, reflecting the better performance in recent months that made our levels unrealistic. We still expect the dollar to weaken with numerous risk factors we see as consistent with renewed depreciation. Our end-2026 EUR/USD forecast is 1.2400 (Q3 previous forecast was 1.2600).

INTEREST RATE OUTLOOK

* Interest rate assumptions incorporated into MUFG foreign exchange forecasts.

With key months of data unavailable by the next FOMC meeting, it is going to be a close call, but we think the Fed will cut. Overall, we do not believe the Fed will fully ignore the alternative data, which has been pointing to further labor market weakness. Therefore, we have not changed our US rates calls or Fed Funds forecasts. We have maintained our December FOMC rate cut view and we argue that going on hold sometime in Q1 makes more sense. In addition, it’s year-end and there are signs of liquidity constraints in the banking system at large. If they do not cut in December, that could unnecessarily shock markets. Further afield there is a risk that the Fed goes on an extended pause in the early part of 2026, which is a risk to our base-case and overall market pricing. If inflation were to rise in Q1, and if the Fed cuts as we expect in December, that could be the last cut from the current FOMC led by chair Powell. At which point the next Fed chair, and potential shift in the FOMC, may result in jumbo cuts (50bp size) returning in the summer. Alternatively, if the data is decelerating as fast as we think it is, it’s possible that the current Fed will not have the luxury to go on hold and end up cutting through to neutral. 

(George Goncalves)

DXY VS RELATIVE EQUITY MARKET PERFORMANCE

Source: Bloomberg, Macrobond & MUFG GMR

YIELD SPREAD BETWEEN SOFR AND FED EFFECTIVE RATE

Source: Bloomberg, Macrobond & MUFG GMR

Japanese yen

MARKET UPDATE

In November the yen weakened further versus the US dollar in terms of London closing rates from 154.06 to 156.15. The yen also weakened versus the euro from 177.74 to 181.13. The BoJ did not meet in November and hence the key policy rate was unchanged at 0.50%, following the 25bp hike in January, the first 25bp rate hike since before the GFC in 2007. The BoJ is also continuing with the policy of cutting JGB monthly purchases at a pace of JPY 400bn per quarter but announced in June that the pace of reduction will be reduced to JPY 200bn per quarter from Q2 2026.

OUTLOOK

After sharp depreciation in October, yen weakness was extended in November as investors’ perception of PM Takaichi being a reflationist hardened. That was reinforced by the fiscal stimulus package that was announced, which was larger than last year (JPY 21.3trn vs JPY 13.9trn). The scale of JGB issuance to fund the supplementary budget was also larger than expected and larger than last year (JPY 11.5trn vs JPY 6.7trn). The government claims the package will contribute to an increase in annual growth of an average of 1.4% over three years, adding to JPY 24trn. This seems optimistic and generally fiscal stimulus packages tend to have a far smaller impact as households and corporates remain cautious and save more. The increased inflation risks have become more pronounced nonetheless and the super-long of the JGB curve sold off sharply. The cost of living measures was the largest portion of the package but did include handouts (child allowance) that the government had originally promised to avoid. USD/JPY hit an intra-day low of 157.89 which we see as in the ‘danger zone’ for intervention and is around where intervention has taken place in the past. Our view is that while the Trump administration is ideologically opposed to intervention and promotes a policy of free markets, it also is very likely unhappy with the optics of a trade deal being completed which is then followed by a sharp devaluation of the yen. We suspect Washington will be strongly opposed to the yen weakening beyond the 160.00-level and hence we would expect intervention before or in and around that level if required.

Scott Bessent has persistently blamed BoJ policy for yen undervaluation. So ideally, a rate hike combined with intervention (if required) would be most welcome in Washington. There is also a domestic political motive. The cost of living is the root-cause of LDP unpopularity and it PM Takaichi wants to address that then efforts to halt yen weakness is logical. The BoJ has been uber-cautious and the time has come to shift its policy stance. We believe the BoJ will soon begin a more explicit attempt to shape market expectations toward a hike on 19^th December.

A December hike is now priced at about 80% so there is scope for front-end yields in Japan to rise further over the short-term. We expect further hikes in 2026 and with the Fed cutting rates we expect a point to arrive when the yen responds to the yield spread change and rebounds.

INTEREST RATE OUTLOOK

* Interest rate assumptions incorporated into MUFG foreign exchange forecasts.

The 10-year JGB yield increased notably in November, by 14bps to close at 1.81%. The move is particularly telling given the 10-year UST bond yield fell by 7bps. It was also notable that the JGB curve steepened with the 30-year yield increasing by 29bps in November. The move underlined the concerns amongst investors over the economic policies being persued by the new Japanese government. The increase in JGB issuance of JPY 11.5trn, larger than expected, portrays a government that is indifferent to the risks of bond market instability. We suspect the government may want this addressed that increases the prospects of a sooner than expected rate hike to alleviate concerns over the BoJ being behind the curve – which has been once source of JGB selling. FX intervention to strengthen the yen would also help support the JGB market. We expect a BoJ hike in December (if not December, January for sure) which will be followed by two further hikes in 2026, in Q2 and Q4 taking the policy rate to 1.25% by year-end. That pace of increase should see the 2s10s curve flatten although the 10-year yield will rise above the 2.00% level next year

10YR, 20YR & 30YR JGB YIELDS

Source: Bloomberg, Macrobond & MUFG GMR

JAPAN VS US FISCAL POLICY UNCERTAINTY

Source: Bloomberg, Macrobond & MUFG GMR

Euro

MARKET UPDATE

In November the euro weakened further versus the US dollar in terms of London closing rates, moving from 1.1537 to 1.1600. The ECB did not meet in November and hence the key policy rate was unchanged at 2.00%, following 200bps of cuts since last year. The ECB is running down APP securities and started PEPP run-off in July last year with EUR 417bn of securities having come off the balance sheet this year through to September.

OUTLOOK

The failure of EUR/USD to advance by much in November made our previous year-end target of 1.2000 difficult to envisage and hence we have lowered our year-end target to 1.1800. The intra-day high-low trading range in November was in fact that narrowest (212 pips) since September 2024, which we believe underlines the mixed cross-currents and uncertain macro outlook, in particular in the US. That in part is explained by the lack of data due to the government shutdown with key jobs data coming after the FOMC meeting on 10^th December. In Europe, the ECB appears happy with the implied message of ‘nothing to see here’ with ECB officials continuing with the guidance that policy is in a good place given inflation is close to the 2% target. Economic data remains mixed with the flow of data suggesting continued moderate growth. The euro-zone PMIs in November indicated stronger conditions in services but more moderation in manufacturing. Industrial production rebounded in Germany (+1.3% MoM) but by less than expected while the manufacturing PMI weakened by more than expected. Growth is set to rebound more notably in 2026 fuelled by increase investment spending. ECB officials for now appear to remain more concerned about upside rather than downside inflation risks. In that regard, data at month-end showing the ECB measure of 1-year inflation expectations rising from 2.7% to 2.8% will concern the ECB.

Germany’s coalition government looks like remaining intact following an apparent compromise deal on proceeding with pension reform. Hence, the risk of political instability continues to rest in France with a budget vote in parliament required before year-end. The bill is now with the Senate and then will come back to be agreed in a joint parliamentary committee that would then be voted on in both houses. A failure to reach an agreement would see a stopgap rollover of the current budget but in that scenario pressure would build for holding early parliamentary elections. This could all come back into focus toward year-end when liquidity conditions are not ideal. The Russia-Ukraine peace deal negotiations are also ongoing although financial market participants remain sceptical that Russia will cede much in negotiations and hence a move toward a credible deal would be a big positive surprise for the markets.

We have lowered our EUR/USD forecast profile given the limited move higher in November. We still see renewed dollar depreciation but weak US jobs data and renewed increased pricing of rate cuts in 2026 is required for the dollar to weaken.

INTEREST RATE OUTLOOK

* Interest rate assumptions incorporated into MUFG foreign exchange forecasts.

The 10-year German bund yield increased in November, by 6bps to close at 2.69%. There were no clear drivers for the move in November and with UST bond yields moving in the other direction we doubt this modest tick higher in yields in November will persist. The inflation backdrop was mostly favourable. While the ECB measure of inflation expectations picked up (for 1yr), actual inflation readings toward month-end were favourable. France CPI data was weaker than expeted with the MoM rate at -0.2% and the YoY weaker than expected at 0.8%. In addition, the minutes from the October ECB meeting did acknowledge that there were some doubts over the economic momentum being enough to deliver the 2% target sustainably and therefore monetary policy which is described as being in a “good place” also that “should not be seen as a fixed place”. Because of weaker wage growth, and our view of a decline in energy prices and a strengthening euro, we continue to expect a mid-2026 rate cut from the ECB. We suspect that this cut will be a one-off next year but that points to the potential for some moderate declines in bund yields.

REAL GDP QOQ VS. 5YR AVG

Source: : Bloomberg, Macrobond & MUFG GMR

PCCI VS CORE CPI

Source:: Bloomberg, Macrobond & MUFG GMR

Pound Sterling

MARKET UPDATE

In November the pound advanced versus the dollar in terms of London closing rates, moving from 1.3135 to 1.3238. In addition, the pound advanced against the euro from 0.8783 to 0.8763. The MPC at its meeting in November kept the key policy rate unchanged at 4.00%, after five 25bp cuts since August last year.

OUTLOOK

The pound strengthened in November with the gain being recorded in the aftermath of the Autumn budget statement from Chancellor Reeves. The Gilt market also gained as investors responded with relief that there were no nasty surprises. The vast bulk of the measures announced were already known via media reporting In fiscal year 2029-30 the budget entails GBP 26bn worth of tax rising measures, with the primary revenue raising measure being the extended freeze of income tax thresholds. The budget resulted in headroom on meeting the self-imposed fiscal rules of GBP 21.7bn, up from GBP 9.9bn prior and was larger than expected. However, the back-loaded nature of the tax rising measures has fed the narrative of the budget being based on ‘fiscal fiction’ given the political difficulty of these measures being adopted around the time of the next scheduled general election. The OBR, as expected, cut the assume growth in productivity that resulted in the growth projection being cut by the OBR in the four years following this fiscal year. Growth this fiscal year was revised higher from 1.0% to 1.5%. There was certainly no eye-catching growth strategy presented in the budget that in our view means the initial positive response in Gilt and FX markets may peter out as investors focus on the increased level of taxation as being a medium-term drag on economic growth.

The budget supported the prospect of a near-term BoE rate cut which was nearly fully priced prior to the budget announcement. The data on inflation and wages had already undershot expectations and the tax increase measures will give the BoE scope to deliver further cuts ahead. Cuts to the green levy will help reduce energy bills and while the BoE has played down the implications for policy it at least could help to reduce inflation expectations. One of the most hawkish MPC members – Megan Greene – stated that it was “encouraging” to see services inflation and wage growth come down but still expressed concern over inflation expectations. While she may vote to hold, her comments in total were less hawkish and reflects the prospects of a shift from the MPC in total. While Greene may vote to hold in December, Governor Bailey will likely vote to cut along with the other members who voted to cut in November. With inflation and wage growth then set to slow further in our view, we maintain that the MPC can cut twice further in 2026.

A rate cut is nearly fully priced in December although three cuts in total over the next 12mths is not fully priced and there is scope for front-end yields to decline further. Weaker employment and slowing inflation plus uncertainty over tax increases ahead will likely see pound underperformance continue with EUR/GBP drifting higher.

INTEREST RATE OUTLOOK

* Interest rate assumptions incorporated into MUFG foreign exchange forecasts.

The 10-year Gilt yield increased marginally in November, by 4bps to close at 4.44%. After a significant decline in October, the 10-year yield surged 20bps during November only for that to be reversed following the Autumn budget announcement on 26^th November. As above, the initial response was positive with the headroom of GBP 21.7bn larger than expected. But the data on inflation and wage growth continued to show a clear downtrend was emerging which is providing a positive fundamental backdrop for Gilts, which should be maintained going forward. A rate cut from the MPC is now very likely in December with MPC members likely more reassured on the outlook for inflation turning more favourable. The budget also coincided with an announcement of a consultation on “expanding and deepening” the market for treasury bills which points to the UK’s debt maturity profile being shortened further with a greater amount of bills issued. Only GBP 108bn of bills are outstanding in a total debt market of JPY 2.9trn. The average maturity of UK debt is around 14yrs, much longer than other countries. This shift in issuance, if confirmed, will be another supportive development for longer-term Gilt prices.

GBP/USD VS 10YR GILT-UST SPREAD

Source: : Bloomberg, Macrobond & MUFG GMR

KEY POLICY RATE VS NOMINAL GDP GROWTH

Source: : Bloomberg, Macrobond & MUFG GMR

Chinese renminbi

MARKET UPDATE

In November, USD/CNY moved from 7.1176 to 7.0749. On 20^th November, the PBoC kept the 1Y and 5Y LPR at 3.00% and 3.50% respectively as expected. In the Q3 monetary policy implementation report, the PBoC maintained a moderately loose monetary policy stance and stated the growth decline in aggregate financing in future is natural, as economic growth model is shifting from quantity to quality driven.   

OUTLOOK

The fourth quarter opened with a weak set of October macroeconomic data, extending the downward growth trend seen in previous months. The most notable drag was the continued slowdown in fixed asset investment (FAI), which contracted by 1.7% year-on-year in YTD terms. Manufacturing and infrastructure sectors posted their weakest growth since the Covid-19 period. Retail sales disappointed despite earlier promotions for the Singles’ Day online shopping festival, while industrial production growth was weighed down by sluggish export performance. The property sector remained under pressure, and household credit demand stayed subdued. On a positive note, two RMB 500 billion policy initiatives have begun to take effect. The RMB 500 billion “new policy-based financial tool” has been fully deployed and is expected to drive total investment of about RMB 7 trillion, according to the NDRC, though project implementation will take time. Meanwhile, another RMB 500 billion bond issuance from unused local government bond quotas is being expedited to repay debt and boost infrastructure investment. For the housing sector, there were unconfirmed reports of government plans to support homebuyers through mortgage subsidies nationwide, increase income tax rebates for mortgage borrowers, and reduce home transaction costs. While these measures could provide moderate support, they are unlikely to quickly reverse weak sentiment.

The resilience of the CNY suggests that markets are looking beyond short-term domestic cyclical weakness and anticipating a pickup in China’s growth next year. The one-year extension of the trade truce between the U.S. and China, along with lower tariffs, adds to this optimism, especially when combined with expansionary fiscal policies in major economies. We have revised China’s 2026 GDP growth forecast upward to 4.8% year-on-year. China remains attractive from an asset revaluation perspective, as markets expect further policy measures aimed at achieving “technological self-reliance,” as outlined in the 15th Five-Year Plan. Meanwhile, a weaker U.S. dollar, driven by continued Fed easing, should exert downward pressure on USD/CNY. However, we expect CNY appreciation against the dollar to be gradual, given China’s persistently weak cyclical performance and potential bursts of risk events. For example, developer Vanke is facing difficulties repaying two bonds worth RMB 5.7 billion due next month. Such default risks could further dampen already fragile sentiment toward the housing sector. Our forecast is for USD/CNY to edge lower to 7.0500 in Q4 2025 and 6.9000 by Q3 2026.

INTEREST RATE OUTLOOK

* Interest rate assumptions incorporated into MUFG foreign exchange forecasts.

With a relatively strong CNY, we are likely to see rising corporate demand for foreign exchange settlement by year-end, which could, in turn, drive further growth in bank deposits. Amid persistently weak loan demand, the gap between deposit and loan growth rates will widen, increasing banks’ allocation demand for bonds—putting downward pressure on bond yields. Latest October data indicates further economic weakening. While economic pressures in the fourth quarter call for additional government countermeasures, large-scale fiscal support is unlikely given that this year’s 5% growth target is expected to be met. As a result, monetary policy will need to step up slightly. Although we expect the PBOC to cut its 7-day reverse repo rate only in Q1 to stimulate domestic demand and guide real interest rates lower, the central bank can adopt a moderately more accommodative stance through liquidity injections, reserve requirement ratio cuts, or increased net purchases of government bonds to keep money supply ample. The near-term risk for the 10-year bond yield is to the downside toward year-end.

PBOC STRONGER FIXING IS GUIDING THE USD/CNY PAIR LOWER

Source: : Bloomberg, MUFG GMR

10Y CGB YIELD HAS STABILIZED AROUND 1.80% IN NOVEMBER

Source: : Bloomberg, MUFG GMR

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