USD: Fed cuts and softer inflation outlook – MUFG

MUFG’s Senior Currency Analyst Lee Hardman notes that stronger recent U.S. employment data have eased immediate pressure on the Federal Reserve to cut rates, but slowing inflation keeps the door open to further easing in 2026. MUFG expects inflation to decelerate further, supports additional Fed cuts, and maintains a forecast for a weaker Dollar supported by diversification flows into non‑US assets.

Stronger jobs but weaker 2026 Dollar view

"Stronger employment growth at the start of this year has eased immediate pressure on the Fed to cut rates, although slowing inflation still leaves the door open to further easing in 2026. Lower U.S. interest rates, increased FX hedging by foreign holders of US assets, and diversification flows into non‑US markets continue to support our forecast for a weaker USD in 2026."

"Downside risks for the USD and short‑term U.S. yields have eased in the near-term following the release of the latest January nonfarm payrolls report, which has reduced immediate pressure on the Fed to cut rates further."

"At the same time, the door will remain open for Fed rate cuts this year if inflation continues to slow. The latest US CPI report for January showed that headline and core inflation slowed to annual rates of 2.4% and 2.5% respectively."

"We expect inflation to decelerate further this year as the inflationary effects of last year’s tariff hikes begin to fade, labour‑market weakness continues to dampen wage growth, and stronger productivity growth allows the US economy to expand without generating additional price pressures."

"In this environment, we continue to favour further Fed cuts and a weaker USD in 2026. The outperformance of assets outside of the US is also continuing to encourage diversification flows and a weaker USD."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)