USD Outlook Shifts: Fed Rate Cuts Now Expected in Late 2026
USD/JPY Price Chart
Recent analysis suggests a shift in expectations regarding Federal Reserve policy and its impact on the US Dollar (USD). While immediate rate cuts are off the table, most analysts now anticipate easing cycles beginning in the second half of 2026, a delay from earlier predictions of cuts in the first half of the year. Danske Bank and DBS both forecast two 25bp cuts in late 2026, citing cooling wage growth, housing inflation, and a 'Goldilocks' economy β strong employment with softening CPI. MUFG also anticipates further easing, driven by decelerating inflation, and predicts a weaker dollar due to diversification into non-US assets. However, stronger-than-expected US employment data has reduced immediate pressure on the Fed. BNP Paribas presents a contrasting view, forecasting a gradual USD depreciation by late 2026, but maintaining a steady Fed Funds rate of 3.5%-3.75% through 2026, supported by robust US economic growth and persistent inflationary pressures from tariffs. Market focus is now on upcoming economic data releases, including GDP and the core PCE index, for clearer signals. The US Dollar Index (DXY) currently holds gains above 97.00.
Key Points
- 1Fed rate cuts are now largely expected in late 2026, delayed from earlier forecasts.
- 2Strong US employment data has eased immediate pressure on the Fed to cut rates.
- 3Analysts anticipate a gradual USD depreciation, driven by factors like inflation, economic growth differentials, and diversification flows.
Market Impact
The delayed rate cut expectations are supporting the USD in the short-term, but a longer-term bearish sentiment persists, suggesting potential for depreciation against currencies like the Euro, Yen, and Pound. Investors are closely monitoring economic data for confirmation of these trends.