The foreign exchange market has had an eventful first half of 2026. A hawkish pivot from the Federal Reserve, a fresh escalation between the United States and Iran, and a wave of central bank policy shifts across Europe and Japan have all left their mark on the major currency pairs. As traders look toward year-end, forecasts from major banks and analysts diverge sharply — a reminder that forex sentiment can swing quickly when monetary policy, geopolitics, and oil prices move at the same time. Below is a breakdown of where the three most-traded pairs — EUR/USD, GBP/USD, and USD/JPY — stand today and where analysts expect them to be by December 2026.
EUR/USD: Range-bound near the lower end
The euro has struggled to build momentum against the dollar this year. After opening 2026 above 1.17, EUR/USD slid to around 1.14 by early July, pressured by a resurgent US dollar. The Dollar Index broke above 100 in June after the Federal Reserve held its policy rate at 3.50%–3.75% and signaled it may need to raise rates further rather than cut them, a marked change from earlier expectations.
The European Central Bank, meanwhile, delivered its first rate hike since 2023, lifting the deposit rate to 2.25% in June, with markets pricing in further tightening later in the year. That should, in theory, support the euro — but a firmer dollar has offset much of the effect so far.
Forecasts for year-end are widely scattered:
- Cautious/bearish camp: Several technical services see EUR/USD ending the year closer to 1.10–1.14, citing persistent dollar strength and geopolitical risk premiums tied to Middle East tensions.
- Base case: A number of analysts expect the pair to settle in a 1.13–1.21 range, with a modest upward bias if the Fed eventually resumes cutting rates while the ECB keeps tightening.
- Bullish camp: Some major banks still see scope for EUR/USD to reach 1.20–1.25 by year-end, betting on structural dollar weakness tied to US fiscal deficits, though these calls have been trimmed since the Fed’s hawkish June turn.
The wide range of outcomes underscores that the pair’s direction now hinges almost entirely on two things: whether the Fed’s rate path stays elevated through the second half of the year, and how quickly the ECB continues to tighten.
GBP/USD: Two-sided risk after a volatile year
Sterling has had a rougher ride. GBP/USD hit a 2026 high near 1.38 in January before slipping back toward 1.32 by late June — near seven-month lows — as the dollar firmed and UK political uncertainty resurfaced following turmoil around the Prime Minister’s position.
The Bank of England has held its key rate at 3.75%, with the committee split and inflation still running above target, particularly in services. The Fed’s more hawkish stance has added further pressure, since UK and US rates are now close to level, leaving the pound with little yield advantage to lean on.
Year-end projections vary considerably by source:
- Several banks expect GBP/USD to hold in a 30–1.40 range, with the pair likely to stay closer to the lower half unless the dollar softens.
- More optimistic forecasts from institutions such as CIBC put the pair near 37, contingent on renewed dollar weakness later in the year.
- The most bullish scenarios, built around an aggressive Fed easing cycle, point toward 45–1.50, though these now look less likely given the Fed’s recent hawkish signals.
- On the conservative end, some models see the pair drifting back toward 30–1.33 if dollar strength persists into December.
For sterling, the story in the second half of 2026 is less about the interest rate gap and more about UK political stability and the broader direction of the dollar.
USD/JPY: A weak yen near multi-decade lows
USD/JPY has been the most dramatic story of the year. The yen has weakened toward levels near 162 per dollar — close to 40-year lows — driven by a mix of safe-haven dollar demand amid the US-Iran conflict, rising oil prices weighing on Japan’s energy-import-dependent economy, and persistent doubts about how aggressively the Bank of Japan will tighten policy.
Japanese officials have repeatedly warned about intervening in the currency market to support the yen, though no confirmed action had reversed the broader trend as of early July.
Forecasts for the pair diverge more than for any other major:
- Yen-bearish view: Some banks, citing persistent US yield advantages, see USD/JPY holding near 160–164 by year-end, or even testing higher levels if oil prices stay elevated.
- Base case: Many analysts expect a gradual decline toward 150–158 as the Bank of Japan continues normalizing policy and the rate differential with the US slowly narrows.
- Yen-bullish view: A smaller group of banks, including a notably bold call from Bank of America projecting a move to 130, argue that BOJ tightening combined with eventual Fed rate cuts could trigger a sharp yen recovery, especially if crowded short-yen carry trades unwind quickly, as they did in the sharp correction of mid-2024.
The scale of disagreement here — anywhere from the 130s to the upper 170s — reflects just how sensitive USD/JPY has become to central bank timing, oil prices, and the risk of a disorderly carry-trade unwind.
What to watch through year-end
Across all three pairs, a handful of shared themes will likely determine where rates land by December 2026:
- The Fed’s next moves. The 29 July meeting is a key checkpoint. A resumption of rate cuts would likely weaken the dollar broadly; continued hawkishness would keep it firm.
- Oil prices and geopolitical risk. The US-Iran conflict has already pushed Brent crude higher, supporting the dollar as a safe haven and adding inflationary pressure that complicates central bank decisions everywhere.
- Central bank divergence. The ECB’s tightening path, the Bank of England’s finely balanced rate decisions, and the BOJ’s normalization pace will each shape their currencies independently of what the dollar does.
- Political developments. UK leadership uncertainty and France’s 2027 election buildup are examples of political risk that can move currencies as much as economic data.
Bottom line
Heading into the second half of 2026, none of the three major pairs shows a strong consensus direction. EUR/USD looks likely to stay range-bound with a mild upward bias if the ECB keeps hiking. GBP/USD faces genuinely two-sided risk tied to both the dollar and UK politics. USD/JPY carries the widest range of outcomes, caught between a still-strong dollar and the growing possibility of a yen recovery. As always in forex markets, positioning should account for a spread of scenarios rather than a single point forecast — and traders should treat any single bank’s year-end target as one input among many, not a certainty.
This content is provided for informational purposes only and is not a substitute for professional advice. AFP editorial staff were not involved in the creation of this content.