Market overview

Q2 2026 has moved decisively away from the calmer currency backdrop many expected at the start of the year. What initially looked like a more orderly period of softer inflation, steadier policy expectations and gradual rate relief has instead been overtaken by geopolitical tension, renewed energy volatility and a sharper reassessment of inflation risk. The IMF has warned that the Middle East war is disrupting the global economy through higher commodity prices, firmer inflation expectations and tighter financial conditions.

That shift matters for FX. Markets are no longer trading a straightforward growth-and-rates story. The focus has shifted back to policy credibility, inflation transmission and the return of risk premia. For corporates, this creates a more demanding backdrop. Price action is likely to be less orderly, forward markets can reprice quickly, and periods of calm may prove brief.

USD: haven support, but with less conviction

The dollar retains defensive appeal, but this is not a clean replay of previous flight-to-safety episodes. The Fed kept rates unchanged in March at 3.50% to 3.75% and said the implications of developments in the Middle East remain uncertain. That leaves the policy path less predictable and the inflation picture more complicated.

At the same time, the US macro signal is mixed rather than clearly recessionary. That leaves the dollar able to attract support during risk-off phases, though not with the same consistency markets once took for granted. Reuters’ April poll found strategists still expect the dollar’s rebound to fade over time, with the euro seen strengthening over the next year. For treasury teams, that points to a market in which USD strength can still arrive in bursts, but without the same one-way conviction seen in earlier stress periods.

GBP: supported by rates, held back by growth

Sterling continues to face an uneasy domestic backdrop. UK activity has shown some resilience, but the broader growth picture remains subdued and the labour market has softened. The Bank of England kept Bank Rate at 3.75% in March, reinforcing the sense that policy cannot turn materially easier while inflation risks remain live.

For sterling, that creates a difficult balance. Weak domestic momentum would normally argue for easier policy, yet renewed inflation pressure reduces the scope for rate cuts. Reuters reported on 21 April that sterling remained trapped in a relatively stable range, with markets still pricing tighter policy expectations for both the BoE and ECB. For businesses, that combination can be awkward. Borrowing costs may stay firmer for longer, financial conditions may remain tight, and hedging levels can become more volatile even when spot GBP lacks a clear directional trend.

EUR: a credible medium-term story, but a tougher quarter

The euro still has a defensible medium-term case, but the near-term path has become less forgiving. The ECB has remained cautious, and policymakers have pushed back against the idea of an immediate rate response, preferring to wait for more evidence on whether energy-driven inflation feeds through more broadly.

That stance keeps the euro from losing its broader support base altogether. Low unemployment, fiscal support and structural investment still offer medium-term backing. Even so, in the current quarter the single currency remains highly sensitive to moves in oil, gas and inflation expectations. The longer-run narrative remains intact, but near-term trading is once again being driven by the energy channel. Reuters market commentary on 21 April noted that EUR/USD was again pressing towards the 1.20 area, underlining that the broader upward bias remains in view even if the path is uneven.

Monfor Forecast rates:

GBP/EUR: relative stability
Q2 2026: 1.1400 to 1.1550
Q3 2026: 1.1400 to 1.1625
Into Q4 2026: 1.1500 to 1.1675

GBP/USD: mild upside, but not a clean trend
Q2 2026: 1.3400 to 1.3625
Q3 2026: 1.3500 to 1.3725
Into Q4 2026: 1.3600 to 1.3825

EUR/USD: gradual firming remains the base case
Q2 2026: 1.1600 to 1.1775
Q3 2026: 1.1700 to 1.1850
Into Q4 2026: 1.1800 to 1.1950

Looking ahead

• Expect FX repricing to remain uneven, with sharper bursts of volatility rather than a steady trend.
• The key question for central banks is whether the energy shock fades or feeds more persistent inflation pressure.
• For the BoE, Fed and ECB alike, weaker growth and firmer inflation risk are now pulling policy in opposite directions.
• For corporates, this is not an ideal environment for chasing the best level or waiting for perfect clarity.
• A disciplined framework built around budget rates, cash-flow timing and known exposures is likely to prove more valuable than strong directional views.
• In this market, reducing regret may matter more than trying to catch the absolute top or bottom.