Periodically, I receive an HSBC newsletter on their views of the following year’s currency moves. Bottom line, after a load of caveats, is that the dollar will drop. In general, that tends to boost equity prices (in terms of US dollars) for a number of reasons, but is also inflationary.
Yogi Berra allegedly said that “Making predictions is difficult, especially about the future”.
Jeff
It has not been an easy year to understand the broad USD outlook. It went from elevated euphoria
to a swift defeat by the end of first half. We believed a pause of its decline was warranted given
the scale of its weakness and signs that some of its traditional drivers were mattering more. This
soon led some to question whether the USD decline is over and its next move should be higher.
As tempting as it is to think the USD’s decline is over, we believe there is modest room
for it to fall. The Federal Reserve (Fed) has resumed its gradual easing cycle. Previous
episodes of it cutting whilst the US economy avoided a recession coincided with a softer USD.
Nonetheless, questions remain over how much easing the Fed may need to do and similarly
with other central banks. Structural factors, such as the US twin deficits and related FX hedging
flows, may intensify. Considering cyclical, political, and structural factors, we believe it’s
premature to declare the USD’s decline complete until these ‘known unknowns’ are clarified.
Among these uncertainties, the Federal Reserve’s actions will be pivotal in 2026, particularly
regarding its target range cuts and the selection of Chair Powell’s successor.
The Fed’s September dot plot implies two more 25bp cuts to Fed funds by the end of next year,
whilst the market has coalesced around a larger adjustment (Chart 1). Our economists’ view is that
the Fed will cut at the December meeting and will then be on hold in 2026. This would be
commensurate with the USD bottoming soon.
However, much would depend on whether the market believes the Fed’s messaging. In contrast, if
the market does chalk up a win and the Fed signals it may still have even more to do and its latest
dots are no longer valid, that increases the chance that the USD’s softness would have further
to run. This debate will only intensify now that the US government shutdown is over, thereby giving
visibility on how the economy looks.
Pressure on how much the Fed will cut is also likely to be influenced by the pick for the next Chair.
While Fed independence typically does not impact the USD, recent sensitivities have emerged. An
orthodox Chair would adhere to the Fed’s dual mandate, resisting deeper cuts, whereas a less
conventional choice might challenge Fed independence. Consequently, the latter scenario could
prolong and accentuate the USD’s decline next year.
◆ As 2025 draws to a close, we think about what is next for the
broad USD, believing further softness lies ahead
◆ Much depends on the Fed’s next steps and who will be its
Chair
◆ We raised our USD-JPY forecasts, reflecting Japan’s fiscal
challenges
Summary
EUR: Germany’s fiscal reforms initially boosted EUR-USD, but US factors remain
crucial.
GBP: Political uncertainty and fiscal challenges around the Autumn Budget (26
November) pose downside risks to GBP-USD.
JPY: USD-JPY may decline from recent levels; but we have raised our USD-JPY
forecasts amid Japan’s fiscal challenges.
CHF: The CHF outlook will hinge on the Swiss current account position.
AUD: Domestic developments have bolstered the AUD, yet external factors are likely
to remain pivotal in influencing its future path.
NZD: Despite current weakness, the NZD may recover with broad USD softness and
domestic growth improvement.
CAD: Uncertainty regarding future US tariff levels persists, suggesting potential
upward risks for USD-CAD through to 2026.
RMB (CNY): We expect USD-RMB to decline over the coming quarters, although the
RMB’s appreciation against USD will be modest, attributed to its yield disadvantage.
SGD: USD-SGD is likely to stabilise around 1.29 in the months ahead.
INR: We expect USD-INR to fall in the next few months before drifting modestly
higher later in 2026, due to India’s current account deficit and the central bank’s likely
rebuilding of FX reserves.
MYR: The MYR’s headwinds have eased, but we caution against over-estimating the
recent MYR appreciation.
Key upcoming rate announcements
Date Central bank
26 November The Reserve Bank of New Zealand
5 December The Reserve Bank of India
9 December The Reserve Bank of Australia
10 December The Bank of Canada
11 December (3am HKT) The Federal Reserve
11 December The Swiss National Bank
18 December The European Central Bank
18 December The Bank of England
Source: Bloomberg, HSBC
HSBC FX forecasts
Spot Q4 25 Q1 26 Q2 26 Q3 26
EUR-USD 1.1604 1.20 1.20 1.18 1.18
GBP-USD 1.3175 1.37 1.37 1.35 1.35
USD-JPY 154.95 152 148 150 151
USD-CHF 0.7944 0.78 0.78 0.79 0.79
AUD-USD 0.6495 0.67 0.68 0.68 0.68
NZD-USD 0.5666 0.62 0.63 0.63 0.63
USD-CAD 1.4039 1.35 1.35 1.35 1.35
USD-CNY 7.1119 7.05 7.00 6.98 6.95
USD-SGD 1.3020 1.29 1.29 1.29 1.29
USD-INR 88.620 87.5 86.5 87.5 88.0
USD-MYR 4.1607 4.15 4.12 4.11 4.10
Source: HSBC forecasts, Bloomberg as at 16:16 HKT on 18/11/2025
Disclaimer: These figures are estimates only. Future performance of the
currencies may vary from the figures provided.
Central Bank policy rate forecasts (%)
Current Q4 2025(f) Q4 2026(f)
USD 3.75-4.00 3.50-3.75 3.50-3.75
EUR 2.15/2.00 2.15/2.00 2.15/2.00
JPY 0.50 0.75 0.75
GBP 4.00 4.00 3.00
Source: HSBC forecasts for Fed funds, Refi rate/Deposit rate, Overnight Call
rate and Base rate
Real GDP forecasts (%)
2025(f) 2026(f) 2027(f)
US 1.9 1.7 1.8
China 4.9 4.6 4.7
Japan 0.8 0.5 0.6
Eurozone 1.2 1.0 1.4
UK 1.5 1.2 1.3
Source: HSBC forecasts