The Xe Global Currency Outlook - January 2026

As we move into 2026, global financial markets are navigating a surprisingly resilient economic backdrop. Despite ongoing U.S. tariffs and pockets of regional weakness, global growth has held up better than expected, central bank policy paths are beginning to diverge, and currency markets are increasingly driven by relative economic performance rather than broad U.S. dollar dominance.

According to the IMF’s October Economic Outlook, global GDP growth is forecast at 3.1% in 2026, only marginally below 2025 levels. This steadier-than-anticipated growth environment is shaping the outlook for major currencies in the months ahead.

Global Themes Shaping Currency Markets in 2026

Several macro forces are defining currency dynamics as the year begins:

• Policy divergence is back: While many central banks cut rates aggressively in 2024–2025, 2026 is shaping up as a year where some central banks pause, others continue easing, and a few begin tightening again.

• The U.S. dollar remains resilient but heavy: The explains recent USD softness, but strong U.S. growth and a still-healthy labour market are limiting the downside.

• Trade realignment matters: Countries that have cooperated with U.S. trade and border initiatives — notably Mexico and parts of Europe — have generally seen currency appreciation.

• Commodity prices (ex-oil) are supportive: Firmer global growth has lifted industrial commodity prices, supporting currencies like AUD and NZD.

U.S. Dollar: Resilient, But No Longer Dominant

The U.S. economy closed 2025 with strong momentum, posting 4.3% annualized GDP growth in Q3. While growth is expected to moderate in late 2025 due to tariffs, a rebound is anticipated in early 2026. Inflation has eased meaningfully, allowing the Federal Reserve to cut rates to 3.50%–3.75% in December.

As a result, the U.S. dollar has drifted lower, particularly against currencies backed by improving growth or tighter monetary policy. However, with the U.S. economy still outperforming many peers, a sharp USD sell-off looks unlikely in the near term.

Europe and the UK: Stabilization Over Acceleration

EUR/USD has consolidated after strong gains in 2025. The European Central Bank has held rates steady at 2.0%, and with Eurozone growth forecast at 1.2% in 2026, the euro is expected to trade in a broad range rather than trend decisively higher. A move toward 1.20 remains possible, but likely gradual.

In the UK, the Bank of England has begun easing, cutting rates to 3.75% to support a sluggish economy. Counterintuitively, sterling has found support as markets interpret rate cuts as necessary stimulus rather than policy weakness. GBP is expected to grind modestly higher against USD in early 2026, though gains may be uneven.

Asia-Pacific: AUD and NZD Stand Out

The Australian dollar enters 2026 with strong tailwinds. Australia’s economy has picked up momentum, inflation remains elevated, and markets are pricing a meaningful chance of RBA rate hikes as early as February. Combined with improving commodity prices and supportive global growth, AUD/USD is expected to trend higher toward 0.70 over 2026.

The New Zealand dollar has also improved after a sharp Q3 GDP rebound. While the RBNZ has paused after earlier rate cuts, markets are now pricing a potential rate hike later in 2026. NZD appreciation may be slower than AUD, but the medium-term outlook has clearly improved.

Japan and China: Structural Forces Dominate

Despite multiple rate hikes by the Bank of Japan, the yen remains weak. Markets are increasingly focused on Japan’s high government debt levels and the implications of higher yields for debt servicing. As a result, USD/JPY volatility is expected to return in 2026, with no clear directional trend yet established.

Meanwhile, the Chinese yuan has remained remarkably stable, even as domestic growth remains sluggish. Strong export performance — particularly outside the U.S. — and active policy management have helped support CNY. USD/CNY is expected to stabilize near the 7.00 level in early 2026.

Key Risks to Watch in 2026

While the baseline outlook is constructive, several risks could drive volatility:

• Renewed USD strength if U.S. growth continues to outperform expectations

• Heightened CAD and MXN volatility as USMCA trade negotiations advance

• A sharper-than-expected slowdown in China’s domestic economy

• Rising Japanese yields triggering disorderly moves in JPY markets

Bottom Line

January 2026 marks a transition point for global currency markets. The era of synchronized central bank easing is fading, and relative growth, inflation, and policy paths are once again driving FX performance. For businesses and individuals managing cross-border exposure, this environment rewards staying informed, flexible, and proactive.

At Xe, we’ll continue monitoring these developments closely — helping you navigate currency movements with clarity and confidence throughout 2026.

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The content within this blog post is not intended for use as financial advice. This content is for informational purposes only.