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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}

March 2026

KEY EVENTS IN THE MONTH AHEAD

1) US-ISRAEL IRAN CONFLICT RISKS

The US-Israel attacks on Iran over the weekend have resulted in predictable moves in the financial markets at the start of March. Our initial take is that this is a conflict that is more likely to last weeks rather than months. The election of the new supreme leader will be an important indicator of the potential resistance from the Iranian regime. Crude oil prices are now up 30% year-to-date after close to a 10% gain in response to the attacks. We believe President Trump will have limited appetite for prolonging the conflict given the mid-term elections in November. A new energy-related inflation shock would be bad news for the Republican party. Nonetheless, we have raised our US dollar forecasts versus currencies of countries that have a high energy import-dependence. Hence, the US dollar on a DXY basis is forecast to be about 1.5% stronger than our previous forecast by year-end. Nearer-term, risks of a larger move stronger for the dollar are greater, hence we have revised more notably.

2) NEW FED CHAIR CONFIRMATION HEARINGS

The US dollar has staged a modest rebound since late January, supported in part by President Trump’s decision to nominate former Federal Reserve Governor Kevin Warsh as the next Fed Chair when Jerome Powell’s term ends in May. The nomination has helped ease investor concerns about recent attacks on the Fed’s monetary‑policy independence. Warsh is widely respected among market participants and central banking circles, which has contributed to stabilising sentiment. US Treasury Secretary Scott Bessent has indicated that the Senate Banking Committee is expected to proceed with Warsh’s confirmation hearings, potentially as soon as this month. However, the timeline could slip due to opposition from Republican Senator Thom Tillis, who has stated he will block the process unless the Department of Justice ends its criminal probe into current Fed Chair Jerome Powell. The confirmation hearings will be critical for assessing the outlook for Fed policy and, by extension, the trajectory of the US dollar. Our baseline expectation is that Kevin Warsh, if confirmed, will support further rate cuts underpinning our forecast for renewed US dollar weakness later this year. However, should Warsh signal less willingness to cut rates, the US dollar could stage a stronger rebound.

3) POLICY ANNOUNCEMENT FROM MARCH NPC IS KEY TO WATCH

China’s “Two Sessions” will convene on 4 March with the opening of CPPCC meeting first followed by the NPC meeting on the next day. Out of the NPC meeting, market will watch the economic targets set for 2026 from the government work report and the medium-term economic agenda from the finalized 15th Five-Year Plan. For 2026, the government is expected to keep the GDP growth target around 5% and adopt a slightly more expansionary fiscal stance. This may include maintaining or modestly increasing the official budgeted fiscal deficit to 4.0–4.5% of GDP (4.0% in 2025) and raising the “broad” fiscal deficit to about 9.0% (8.4% in 2025) through larger special bonds quotas. Overall, no major policy surprises are anticipated from the NPC meeting.

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 February the US dollar recovered modestly against the euro in terms of London closing rates, from 1.1881 to 1.1818. The dollar strengthened more against the yen, from 154.32 to 156.05. The FOMC did not meet in February and hence the range for the federal funds was 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, after a 2.6% drop in January rebounded – advancing by 0.6%. The gains toward month-end have extended further in response to the US-Israel attack on Iran over the weekend. There was a high level of anticipation on an attack and the killing of the supreme leader has raised investor expectations on a regime change more aligned to US interests. However, the situation remains highly uncertain and who is chosen as the new leader will give an indication of what may lie ahead. Crude oil prices are up close to 10% since the start of the attack and year-to-date Brent crude oil has advanced 30%. The near-term risk is that the hope of a relatively short-term attack shifts and investors price in risks of a more prolonged attack with Iran having the ability to sustain attacks across the Middle East. Iranian authorities have stated they do not intend to block the Strait of Hormuz but if that was to happen, we could feasibly see crude oil and natural gas prices surge further.

Middle East uncertainties have emerged at a time of increased uncertainties over US trade tariff policy. The main conclusion we would draw from the Supreme Court ruling against the use of IEEPA for reciprocal tariffs is that we have likely passed the point of peak-tariff rates, certainly for this year. Section 122 tariffs have been set at 10% but only for 150 days so the overall effective tariff rate has come down and could come down further – the peak was 18.3% and Yale Budget Lab now estimates a level of 13.7%. In fact we already held the view that tariffs could come down this year – not only because of the assumption on the ruling but also due to this being a mid-term election year and Trump’s falling popularity is linked to failure to bring down the cost of living (nearly all polls indicate that). The tariff outlook will, at the margin, help lower inflation this year and open up scope for more Fed easing than priced which will weaken the dollar.

We are publishing our updated FX Outlook at a highly uncertain time but our key take-away at this stage of hostilities between the US/Israel and Iran is that the market moves are contained on the hope of the conflict not being prolonged. However, the risk is that investor optimism fades if Iran resists engaging with the US. That would see energy prices surge further and the dollar advancing further. Our year-end dollar forecasts have not been changed significantly on the assumption that this conflict will be relatively short. But over Q1 into Q2, the dollar can extend further.

INTEREST RATE OUTLOOK

* Interest rate assumptions incorporated into MUFG foreign exchange forecasts.

Judging broader markets, it’s a low conviction world. Yet, the message from the forecasting community is that there is high conviction it’s going to be a banner year in the US. Well, we are two months into 2026 and in our view the jury is still out on what lies ahead. Meanwhile markets are plagued by this inconsistency on the outlook and focused on bearish factors (like private credit, high valuations, Ai disruption and geopolitics) leading to another decline in rates (and torwards the MUFG US rates path). Although its not priced-in, we still see a path towards the Fed cutting before Powell leaves his post (cutting potentially at his last meeting if risk markets falter or labor worsens). However its also possible the Fed would drag their feet and not cut until the next Fed chair is in place (likely Warsh in June). Based on our bearish leaning view, we believe that the Fed will cut 3 times to/under neutral in 2026 (before the mid-terms). Its possible markets have overshot and will eventually stabilize and that rates drift up and match our Q1 target for 10yr rates. Its also possible that the 10yr is capturing the Ai disruption/deflation risk that still lies ahead. We advocate buying Treasuries on dips given all of the uncertainty.

 (George Goncalves)

US TRADE TARIFF REVENUE

Source: Bloomberg, Macrobond & MUFG GMR

USD PERFORMANCE VS. PRICE OF OIL

Source: Bloomberg, Macrobond & MUFG GMR

Japanese yen

MARKET UPDATE

In February the yen weakened versus the US dollar in terms of London closing rates from 154.32 to 156.05. The yen weakened marginally versus the euro from 183.35 to 184.42. The BoJ did not meet in February and hence the key policy rate was 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 at a pace of JPY 400bn per quarter but announced last June that the pace of reduction will be reduced to JPY 200bn per quarter from Q2 2026.

OUTLOOK

The yen advance in January did not last and once US dollar sentiment improved, USD/JPY rebounded notably. The LDP won a resounding victory in the general election on 8th February but this did not translate into yen selling. A large yen short position had been built up and there was a concerted effort by the government to communicate a message of fiscal responsibility. The fact that the LDP no longer needs to the support of Ishin in parliament also means the LDP is not beholden to any policy commitments. That said, while the message from PM Takaichi and FM Katayama was fiscal prudence, there remains a risk that investors may start to doubt that. The suspension of the food sales tax looks like it will still go ahead but the government has promised not to issue additional JGBs to finance it. There was also an expectation that the government would allow the BoJ freedom to pursue tighter monetary policy. However, a Mainichi report suggested that the first post-election meeting between PM Takaichi and Governor Ueda had resulted in renewed pressure to maintain a looser policy. This report has not been denied giving fuel to the belief that Takaichi remains a reflationist at heart. The Nikkei also reported that the Fed checking rates in January was instigated by the US not Japan suggesting less concern in Tokyo over yen depreciation. There is still near-term risks that Takaichi’s reflationist policy wishes could fuel increased concerns over inflation and encourage renewed selling of the yen.

We can’t be sure on these media reports but what will be important going forward in determining yen performance is BoJ policy. Exerting pressure on the BoJ to maintain a looser policy could backfire, creating JGB market instability and yen depreciation that would annoy Washington. One factor that could see increased BoJ caution would be increased tensions between Japan and China. The latest steps from China curtailing exports of rare earths and other key minerals and the already sharp drop in tourism to Japan could be cited by the BoJ as a reason for caution in hiking rates. For now though we maintain that the BoJ will raise rates twice to 1.25%.

The yen has weakened in response to the US-Israel attack on Iran. As of now, UST bond yields are modestly higher in the US with the focus on inflation risks rather than a strong flight to safety. That could change, and if yields fell the yen would strengthen. But we assume the geopolitical backdrop will weigh on the yen.

INTEREST RATE OUTLOOK

* Interest rate assumptions incorporated into MUFG foreign exchange forecasts.

After the heavy sell-off in January on fears over fiscal slippage on a strong LDP election victory, the realisation of that led to the opposite suggesting to some degree the bad news was well-priced in January. The government did also help restore some confidence by sending a strong message that the government would be fiscally prudent. That resulted in the 10-year JGB yield falling 13bps to close February at 2.12%. We also now know, following the release of JSDA JGB flow data that foreign investors turned strong buyers of JGBs in January when yields jumped sharply. Foreign investors bought JPY 2,175bn worth of super-long JGBs in January, the third largest monthly total on record. JGBs were also helped by the nationwide CPI data that was weaker than expected – the core-core annual rate fell from 2.9% to 2.6% in January, down from a recent peak ot 3.4% in July last year. Fiscal slippage risks have not gone away but more subdued inflation going forward will help to diminish the risks of further JGB market instability. With the BoJ to hike, a further rise in the 10-year yield is likely but the curve is set to flatten as the terminal rate approaches.

SUPER-LONG JGB NET PURCHASES BY FOREIGNERS

Source: Nikkei & MUFG GMR

BOJ POLICY RATE 1YR, 2YR, 3YR FORWARDS

Source: Bloomberg, Macrobond & MUFG GMR

Euro

MARKET UPDATE

In February the euro retraced modestly against the US dollar in terms of London closing rates from 1.1881 to 1.1818. The ECB at its meeting in February left the deposit rate unchanged at 2.00% - the level reached following 100bps of cuts 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 depreciation in February has extended in response to the US-Israel attack on Iran. How this plays out over the coming days will be key for energy markets and hence euro direction. TTF natural gas has surged nearly 50% in response and if extended or sustained, will add to euro downside pressure. In February 2022 when Russia invaded Ukraine, the initial EUR/USD selling was contained but this quickly changed and ultimately EUR/USD fell from 1.1200 to 0.9500. So a move over the short-term back below the 1.1500-level is plausible if Iran resists and investors’ perception of the timeframe of hostilities lengthens.

Our view remains that the ECB policy rate will remain unchanged at 2.00% this year. However, the risk to that view is certainly that the ECB sees scope for additional rate cuts later in the year. The appreciation of the euro (based on our forecasts) this year and given our view of a continued fall in energy prices and moderating wage growth certainly point in the direction of having some scope to ease. Some of the data in February also highlighted some weakness in inflation. Annual CPI in France slowed to just 0.4% in January, much weaker than expected. Annual inflation in Belgium and Italy slowed to 1.1% and 1.0% respectively.

There is a risk that the Supreme Court decision banning the IEEPA tariffs could create tensions with the EU. In response to the decision, the EU announced that it was delaying a vote to ratify the trade deal with the US due to the uncertainties created by the Supreme Court decision. Still, the sentiment data and some forward looking hard data suggest the outlook for the German economy is improving. The advance Composite PMI jumped from 52.1 to 53.1 in February – the 6mth average of 52.5 was the highest since July 2022. Factory orders strength has continued with the December data revealed an annual increase of 13.0%, the highest since February 2011 when the covid period is excluded. Any doubts that there would be delays in commencing works related to the infrastructure and defence spending fiscal package are surely no longer justified with an imminent pick-up in growth likely.

EUR/USD has reversed its sharp move higher in January and this correction could extend further depending on natural gas prices and expectations on how long this conflict lasts. We have only modestly lowered our Q3 and Q4 EUR/USD forecasts.

INTEREST RATE OUTLOOK

* Interest rate assumptions incorporated into MUFG foreign exchange forecasts.

The 10-year German bund yield fell in February, by 20bps to close at 2.64%. the drop cam after the 10-year yield hit the 2.90% level on a number of ocassions in December, January and again in early February. The drop in February was the largest since April last year when the Lineration Day tariffs were announced causing a major risk-off move. There were no obvious risk-off catalysts on this ocassion although the longering risk of an attack on Iran helped support bund prices. ECB President Lagarde stated in February that the ECB must be “agile” in setting monetary policy which could be viewed as being open to cutting rates if the incoming data warranted it. Inflation has come in softer in certain countries, as stated above, that has helped put downward pressure on yields. A stronger currency, renewed declines in crude oil prices (our view this year) and more benign wage growth will all help to keep yields moving modestly lower. The bigger than expected move in the 10-year Bund yield in February means we have adjusted our levels through the remainder of the year lower.

EZ CPI TRENDS BY MAJOR MEMBERS

Source: : Bloomberg, Macrobond & MUFG GMR

COMPOSITE PMI – EZ VS. GERMANY

Source:: Bloomberg, Macrobond & MUFG GMR

Pound Sterling

MARKET UPDATE

In February the pound weakened modestly versus the dollar in terms of London closing rates, moving from 1.3719 to 1.3460. In addition, the pound weakened against the euro from 0.8660 to 0.8780. The MPC at its meeting in February left the key policy rate was unchanged at 3.75%, after six 25bp cuts since August 2024.

OUTLOOK

The pound weakened in February and was in fact the second worst performing G10 currency in both February and on a year-to-date basis. The underperformance largely reflects the move in short-term rates in February. Pricing for a March BoE rate cut moved from just 4bps at the end of January to 20bps now – implying an increased probability of a cut from 15% to 80%. The 2-year Gilt yield fell 20bps and reached a level not seen since April 2023. A March rate cut is better priced now following the jobs and inflation data. The jobs data was the key catalyst for the shift in pricing with the unemployment hitting a new high of 5.2%, just short of the covid peak of 5.3%. PAYE employment data revealed another month of job losses – the fifth month in a row. Wage growth also continued to slow with the private sector wage, ex-bonus 3mth YoY rate falling to 3.4%, the lowest since November 2020. The CPI data was a bit more mixed – the headline rate fell sharply to 3.0% but services inflation fell 0.1ppt to 4.4%, less than expected. Given those in the MPC opposed to rate cuts cite sticky inflation as the concern, the hawks will still have reason for caution at the meeting in March. Given the 5-4 split in February and the close-call decision for two of the majority that voted for a hold, we did see scope for one or both shifting to vote for a cut in March. However, following the attacks on Iran and the retaliation we suspect the MPC will delay cutting from March to April – assuming by then the risks related to the Middle East and energy prices have receded. 

The BoE will also be encouraged to cut following the good news on the UK’s fiscal position that can provide continued support for Gilt prices. The UK recorded a budget surplus of GBP 30.4bn, the largest January surplus on record, and GBP 15.9bn more than January 2025. The year-to-date budget deficit now stands at GBP 112.1bn, well below the GBP 120.4bn projected by the OBR. Since October last year, the UK Gilt market has outperformed other key bond markets as inflation and fiscal fears recede. The 10-year Gilt yield is down nearly 40bps since the start of October, with the UST bond 10-year yield down a more modest 10bps. The Germany bund yield is close to unchanged while the JGB yield is up nearly 50bps. The improved UK bond market conditions and reduced fiscal risks could help deter Labour MPs from a leadership challenge, even following the disappointing by-election result on 26^th February.

Again, similar to other G10 currencies, the pound could see increased selling versus the US dollar in response to the US-Israel attack on Iran. Resistance from Iran and continued attacks will likely see energy prices extend gains, hitting currencies like the pound. We have adjusted lower our Q1 and Q2 levels lower to reflect these risks.

INTEREST RATE OUTLOOK

* Interest rate assumptions incorporated into MUFG foreign exchange forecasts.

The 10-year Gilt yield fell sharply in February, by 29bps to close at 4.23%. The closing level was around our previous Q3 forecast so we have adjusted the yield forecast profile a little lower. As mentioned above, the flow of data saw the prospects of a near-term rate cut increase which has helped drive Gilt yields lower. The 10-year yield drop was also helped by the larger than expected January budget surplus which increases the prospects notably that the full fiscal year deficit will be smaller than projected. This provides a positive backdrop for the Spring statement by Chancellor Reeves on 3^rd March. The smaller budget will help provide additional headroom and help investor confidence. The scope for the drop in 10-year yields could be relatively limited given we are approaching the neutral policy rate – we suspect the BoE will pause after reaching a policy rate level of 3.25%. In parliamentary testimony in February, Governor Bailey acknowledges the debate is whether to cut or not but said it was “genuinely and open question” as to whether the justification would be there. We assume the BoE will hold off from a cut this month due to higher energy prices stemming from Middle East risks, before delivering two further cuts in Q2 and Q3.

EUR/GBP VS. SHORT-TERM YIELD SPREAD

Source: : Bloomberg, Macrobond & MUFG GMR

TWI GBP VS. PRICE OF OIL

Source: : Bloomberg, Macrobond & MUFG GMR

Chinese renminbi

MARKET UPDATE

In February, USD/CNY moved from 6.9520 to 6.8616. On 24th February, the PBoC kept the 1Y and 5Y LPR at 3.00% and 3.50% respectively. In the 4Q 2025 monetary policy implementation report released on 10th February, the PBoC reiterated that it will continue to implement a moderately loose monetary policy, with promoting stable economic growth and a reasonable rebound in prices as key considerations.

OUTLOOK

This Lunar New Year (LNY) holiday period saw some consumption recovery helped by the longer than usual 9-day holiday break this year, consumption stimulating measures issued by 9 government agencies before the New Year, and the increased tourism activity due to visa free policies. The Ministry of Commerce reported that the average daily sales at major retail and catering businesses nationwide rose 5.7% from LNY last year, marking a 1.6ppts growth acceleration, and the number of visitors and sales revenue at 78 key pedestrian streets (commercial districts) monitored by the Ministry of Commerce increased by 6.7% and 7.5% respectively compared to the Spring Festival holiday last year. Over the period, the Ministry of Culture and Tourism data showed a total of 596 million domestic trips, a 95 million increase from 8-day LNY holiday last year. Meanwhile, the domestic tourism spending increased by 18.7% to RMB 803bn. While this set of spending and travel data is positive, the subdued January’s household new loan demand still points to weak confidence, the strength of subsequent consumption still requires continued policy support. Beyond consumption, we expect China’s exports to remain strong in near term, as suggested by major ports container throughput data as of 22^nd February, rising by around 14%yoy. That said, construction activities likely have remained subdued as reflected in YTD cement shipment rate and rebar consumption, despite a strong net government bond issuance in January at RMB 976bn.

IEEPA tariffs being struck down by US Supreme Court on 20^th February helped to fuel positive sentiment on CNY in February, with the IEEPA specific tariffs on China (10% fentanyl + 10% reciprocal) being substituted by 10% (likely 15% afterwards) Section 122 tariff – This could help reverse some negative impact on China exports and give China stronger negotiation position with Trump administration in areas including technology and Taiwan. Looking ahead, near term key focus would be early March NPC, and on the impact of Middle East conflict. We expect government to give some assurance about a stable growth of Chinese economy for 2026, while the latter may trigger further oil price increase in near term. Having said it, we expect the CNY to remain relatively stable, due to China’s increased ability in buffering such shocks with its massive crude reserves. China’s high level energy self-sufficiency (82%) has reduced the economy’s overall sensitivity to oil price spikes, especially relative to neighbouring economies. China’s unique policy framework and strategic preparations may provide a significant buffer.  PBOC recently cut the foreign-exchange risk reserve ratio for forward FX sales from 20% to 0%, to slow the CNY’s recent fast rise.

INTEREST RATE OUTLOOK

* Interest rate assumptions incorporated into MUFG foreign exchange forecasts.

Though the 10-year CGB yield moved lower in January by 4bps and another 2bps through mid-February to 1.79% partly reflecting market expectations of further easing this year, the yield moved 3bps higher to 1.82% post LNY holiday in February. While this could be due to short-term volatility, we think it likely also reflects improved market sentiment as evident by stronger CNY and modestly higher CSI 300 index (+1.4%) post US Supreme Court ruling on IEEPA tariffs, which may have triggered some CGB sell-off. Looking ahead, we think the messages coming out of March NPC will likely reaffirm China’s ambition in technological development and fit into China’s assets revaluation theme, which may post modest upward pressure on 10-year CGB yield too. Together with the continued front-loaded government bond issuance and gradual bottoming out of the economy, they are likely to offset downward pressure on bond yield from potential further monetary easing. As we expect the overall economy likely to remain soft in Q1, we may see a mild policy rate cut (-10bps) in late March after the release of major monthly macro data for Jan-Feb period in mid-March. We think the PBoC may be even more proactive in addressing cyclical weakness in Q2.

WIDENING GAP BETWEEN SURVEYED AND ACTUAL PBOC USD/CNY FIXING

Source: : Bloomberg, MUFG GMR

PERFORMANCE OF CSI 300 AND 10Y CGB YIELD ARE CLOSELY LINKED

Source: : Bloomberg, MUFG GMR

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