FX Outlook 2027: Seven Key Calls

(MENAFN- ING) Winners and losers in FX next year Source: ING, Refinitiv

"> Not a breakout year for volatility

Our most important FX call for 2027 is the market environment. Our macro-driven call is that lower oil prices and only a modest recalibration in global monetary policy mean that FX volatility can stay low. This is not 2022/2023, when major central banks belatedly delivered 500bp tightening cycles to deal with double-digit inflation. If 2026 has shown us anything, it is that FX markets can prove quite resilient in this high-growth, high-inflation global economy. And markets have proved quite resilient to geopolitical risk as well.

For the majority of the last five years, the market has overestimated FX volatility. There may be some structural factors at play here, such as huge growth in financial assets bringing in more liquidity to the FX market and the greater use of FX pricing algos on the buy-side, limiting the market fallout when trading conditions thin.

Yet market volatility has not vanished. There are plenty of risks out there, which we highlight in a dedicated section below. The same applies for market liquidity. If the shock is big enough – such as Liberation Day tariffs in 2025 or the start of the Iran war this year – market depth can fall away quickly. The prospect of fat tails, low-probability, high-impact event risks, is certainly a threat to global FX markets. But the bar for these risks to raise volatility is a high one.

Volatility has mostly undershot expectations in 2026 Source: ING, Refinitiv

"> Look no further than central banks in G10

In a year dominated by geopolitical risk and energy shock, currency investors quickly moved beyond headline trading and increasingly looked to short-term rate differentials as the primary guide for currencies. We expect that to remain the case next year.

Central bank tightening is moving beyond its“insurance” phase, requiring evidence that inflationary pressures are becoming persistent. Oil prices will remain part of the story, but we think the more important distinction is between economies where the shock can generate more lasting inflation and those where it cannot. On top of that, the central banks' FX-specific approach will be key. Remember how, in 2022-2024, the fear of amplified inflation effects from a weak currency prompted tighter fiscal policies among some often dovish-leaning central banks.

Here are our top picks among G10 currencies for next year:

JPY – the best risk/reward. We don't have a huge outperformance of the yen in our forecasts, especially relative to the euro. But that's primarily due to our assumption that the euro will drop its French-related risk premium by end-2028, and a carry-favourable environment can somewhat contain yen gains. However, we think the yen offers the best risk-reward profile in G10. Alongside being sharply undervalued based on long-term fundamentals, it faces limited risks of dovish repricing as the Bank of Japan's tightening cycle predated the Iran war. It incidentally has strong safe-haven value against some fat-tail risks (AI bust, fiscal dominance, dollar debasement, some geopolitical events) and stands to be a beneficiary of an ultimate capitulation in USD rates. Downside risks are, crucially, limited by a coordinated Tokyo-Washington effort to prevent sharp USD/JPY rallies. CHF – SNB turning pro-franc. If 2027 is the year when global interest rates peak and then reverse, the opportunity cost of holding the franc starts to fall. We also think the Swiss National Bank will prove more tolerant of franc strength. Not only are there fewer complaints about the strong franc from local corporates, but Switzerland's inflation is much lower than trading partners and the SNB might again opt for nominal franc appreciation to keep the real exchange rate stable. NZD – The high-beta gamble. Among higher-beta currencies, we see good potential for the New Zealand dollar next year. The Reserve Bank of New Zealand has delivered a few dovish surprises, but we think it is underestimating the inflation risks for 2027: we expect at least two hikes, also helped by a fairly robust growth backdrop. NZD should be favoured against the Australian dollar to play a decline in global rates, as the Reserve Bank of Australia may already shift to cuts in the third quarter of 2027. Sterling, dollar and AUD face largest dovish repricing risk Source: ING, Refinitiv

"> Dollar decline is delayed, not cancelled

Our baseline for global inflation in 2027 remains benign, leaving most of our major central bank calls more dovish than current market pricing. We expect the Federal Reserve to deliver one final hike in December 2026, taking rates to a 4.25% peak, but we don't think the additional hikes priced by 3Q27 will materialise. Modest second-round effects should fail to sustain inflation once the 2Q27 base-effect decline comes through. Importantly, and unlike in other economies, we think benign inflation rather than weaker growth will be the main catalyst for a dovish Fed turn. That means markets may be reluctant to price a large Fed cutting cycle too early, but it's equally an environment where we envision a Fed cut in 4Q27. Ultimately, we expect a nearly 100bp drop in the 2-year USD swap rate by the end of 2027, with most of the move concentrated in the year's second half.

We expect the dollar to weaken alongside that repricing, with greater conviction in the downside story later in the year. The Fed should remain cautious about turning dovish before clearer evidence of disinflation emerges, while elevated funding rates will continue to make it expensive to sell or hedge dollars until some easing is priced in. And because we also hold dovish views on other central banks, we don't expect narrower USD short-term rate differentials to trigger a particularly large dollar downturn. We target a roughly 5% decline in DXY to 97 by end-2027.

Front-end rates to drive DXY lower Source: ING, Refinitiv

"> Bond premium on the euro needs bad news fuel

Our colleagues in the macro and rates team remain cautious about a recovery in French sentiment in the next couple of quarters. Weak growth (0.5% in 2027) should continue to make fiscal arithmetic complicated, and we forecast a deficit of 5.5% next year – assuming a budget is passed – above the 5.0% government target. Election frontrunner Marine Le Pen has signalled large spending cuts, although their credibility remains in question. She is, anyway, a more market-friendly candidate than left-wing rival Jean-Luc Mélenchon.

We think markets will be wary of jumping into a meaningful OAT relief rally before the presidential election (18 April-2 May) and likely parliamentary elections in the summer are out of the way. We are not forecasting another big selloff in French bonds but think 125-150bp will be the norm for the OAT-Bund 10yr spread into 2Q27, before some tightening towards 100bp in 2H27.

The euro has been embedding a French risk premium since early October, meaning a further material deterioration in sentiment would probably be needed to generate additional idiosyncratic pressure. Historically, the link between euro-area sovereign spreads and FX has been patchy, with stress episodes often requiring a steady flow of negative news to sustain the correlation.

We therefore expect French political risk to keep euro sentiment somewhat subdued into the elections and a subsequent bond-market relief rally to offer some support, but not to displace central bank expectations as the main driver of EUR crosses next year. In other words, we really need to see a significant deterioration in the French situation, prompting ECB bond market intervention, for EUR/USD to sustain a move below 1.10 through 2027.

EUR already embeds French risk premium Source: ING, Refinitiv

"> Central Europe: Same shocks, different paths for local FX

The Central Europe region is entering a year of divergence. The Czech Republic, Poland and Hungary face similar risks from energy prices, geopolitics and volatile global markets, but increasingly different monetary, fiscal and growth dynamics mean CEE3 is becoming less of a single FX trade.

In the Czech Republic, the Czech National Bank has already delivered two hikes, taking rates to 4%, and remains the most hawkish central bank in the region. If inflation proves more persistent, further tightening remains possible. Positive nominal and real rate differentials and high credibility should therefore keep the koruna relatively defensive during periods of global uncertainty, while any easing of external risks could put it back on an appreciation path.

Poland is moving differently. The National Bank of Poland is still waiting to deliver its first hike, leaving the zloty with less monetary support for now. Strong growth and sizeable EU inflows remain important anchors, but narrower rate differentials, loose fiscal policy and rising political and rating risks have weakened PLN's relative appeal. We therefore see the zloty as more vulnerable to higher global yields, energy prices and geopolitical risks.

Hungary is heading in the opposite direction, with the National Bank of Hungary having cut rates in recent months. We expect another cut only later next year, provided global conditions allow it. Attractive carry, EU-fund inflows and an improving external balance should support the forint, while progress towards euro adoption provides another positive longer-term story. The central bank's focus on the exchange rate should meanwhile limit the pace of easing and keep EUR/HUF biased towards the stronger end of its range.

Divergent central bank responses to the same shock (%) Source: ING, Macrobond

"> Asia: Rotation underway, tech currencies should lead

A softer dollar should provide a broad tailwind for Asian FX, particularly in the second half of 2027, but we expect performance to remain highly differentiated. We favour the Korean won and Taiwanese dollar, expect further renminbi appreciation – albeit with greater two-way volatility – and see continued downside risks for the Indonesian rupiah and Philippine peso. We are more constructive on the Indian rupee.

Current account strength should continue to favour the tech currencies. Although the AI cycle may be plateauing, activity remains high and strong export revenues should support the KRW and TWD. Exporter FX conversion and measures encouraging the repatriation of overseas assets should provide additional support. CNY should also benefit from strong external balances, although we expect a less one-directional appreciation trend.

Rate support will become less favourable. Most Asian central banks are further advanced in their tightening cycles than the Fed and should finish hiking by early 2027 before preparing for easing. Narrowing rate support should particularly weigh on the rate-sensitive IDR. Continued household and corporate demand for foreign assets could also offset some of the benefits from strong current accounts.

Lower oil and food prices should help importers in the second half of 2027, but capital flows are unlikely to recover evenly. Political uncertainty and the MSCI downgrade should also remain headwinds for the IDR, while weaker FDI inflows leave the PHP vulnerable. By contrast, we favour the INR, where resilient growth, supply-chain diversification and continued FDI should provide support, while leaving India less exposed to swings in the AI cycle.

Asia: change in current account balance and local currency (2Q26 vs 2Q25) Source: ING, Macrobond

"> Latam: Banxico's neglect of the peso stands out

We've said that central bank policy is going to be more important than ever in 2027. And exchange rates can be an important part of the monetary toolkit – especially in small, open economies. In a world where central bank tightening cycles are being priced more hawkishly, Banxico's unabashedly dovish stance stands out.

When cutting rates to 6.25% in November, Banxico noted that, because of slack economic conditions, the pass-through of exchange rate fluctuations to consumer prices would be limited. The IMF puts that economic 'slack' – or the negative output gap – at 0.4% of GDP in 2027. That makes Banxico far less concerned about a weaker currency than most other central banks.

In addition, Banxico has now cut the peso's policy rate protection to just 225bp over the Fed. That is a record low and leaves the peso vulnerable to any deterioration in the external environment. We see the peso as a relative underperformer in 2027.

Further south, the Brazilian real has been causing a lot of pain to investors recently. The fear is that President Luiz Inácio Lula da Silva's pre-election giveaways will come home to roost next year. His choice of Finance Minister is going to be important, as will any progress on a 2027 budget. Preventing a bigger sell-off in the real, however, is the independent central bank running very high real interest rates. It's a courageous call, but we think the real can recover a lot of its recent losses and outperform Mexico's peso.

MXN and US-Mexico policy rate gap Source: ING, Macrobond

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