BNP Paribas economists have outlined a gradual depreciation path for the US Dollar (USD) against the Euro (EUR), while projecting stabilization against the Japanese Yen (JPY) and British Pound (GBP) through 2026 and 2027. They forecast EUR/USD to reach 1.21 by Q4 2026 and 1.25 by Q4 2027, with USD/JPY at 160 and GBP/USD at 1.35 by Q4 2026 and 2027 [1][2]. The Federal Reserve is expected to keep the Fed Funds target range steady at 3.5%-3.75%, adopting a 'two-sided outlook' that signals readiness for either rate hikes or cuts as needed [1]. US GDP growth is projected at 2.4% in 2026, with inflation overshooting at 3.5% [1].
For the United Kingdom, BNP Paribas anticipates a significant slowdown in GDP growth to 0.7% in 2026 from 1.4% in 2025, with quarterly expansion dropping to about 0.1% [2]. Inflation in the UK is expected to re-accelerate to 3.6% in 2026, before easing only slightly to 3.3% in 2027, remaining above the Bank of England's (BoE) target [2]. This renewed inflationary pressure is attributed to the war in Iran [2]. Contrary to previous expectations of monetary easing, BNP Paribas now forecasts a 50 basis point tightening by the BoE in 2026 [2]. Ten-year gilt yields are projected to remain elevated in 2026, before declining to 4.30% in 2027 as net supply decreases, political risk premia fall, and markets begin to anticipate BoE rate cuts [2].
Both sources agree on the stabilization of the yen and the pound against the dollar, with specific forecasts for USD/JPY and GBP/USD exchange rates by Q4 2026 and 2027 [1][2]. The outlook for the US Dollar is characterized by a gradual depreciation against the euro, driven by broader diversification away from the dollar and persistent price tensions, while the pound is expected to stabilize despite domestic economic headwinds [1][2].
No immediate market reactions are discussed in the sources, but the projections suggest a medium-term shift in currency valuations and interest rate expectations for both the US and UK [1][2].
CONCLUSION
BNP Paribas projects a gradual weakening of the US Dollar against the euro and stabilization against the yen and pound, while the UK faces slower growth and persistent inflation, prompting unexpected monetary tightening. These forecasts indicate a medium-term adjustment in currency and bond markets as central banks respond to evolving inflation and growth dynamics.