**2025 Foreign Exchange Market Review and Outlook for 2026**
*Based on reporting by Adam Button, Forex Factory (Original Article: [Forex Factory News](https://www.forexfactory.com/news/1376079-2025-fx-wrapped-2026-outlook))*
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**Overview: The Changing FX Landscape**
2025 has seen major transformations in the global foreign exchange (FX) market. The year was characterized by shifts in monetary policy, geopolitical events, shifting growth prospects, and evolving investor sentiment. Currency traders witnessed high volatility, powered by central bank decisions, inflation trends, and new risks on the horizon. As 2026 approaches, the market is preparing for further adjustments, with a close eye on the prospects for major currencies and the macroeconomic indicators that drive them.
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### Inflation and Central Bank Policy: The Drivers of 2025
**1. Rollercoaster Inflation Trends**
– Global inflation pressures remained stubbornly persistent during the first half of 2025, particularly in advanced economies.
– The United States, Eurozone, and United Kingdom all saw core inflation numbers consistently above central bank targets, while emerging markets faced country-specific spikes.
– A key story was persistent service inflation, which complicated policy decisions despite easing energy and commodity prices.
**2. Central Bank Responses and Divergence**
– The US Federal Reserve (Fed), European Central Bank (ECB), and Bank of England (BoE) all delayed significant cuts, maintaining higher interest rates than markets had anticipated entering the year.
– Central banks adopted a data-dependent stance, responding to inflation and wage data rather than pursuing predefined policy paths.
– This led to a divergence between ‘higher for longer’ currencies and those where rate cuts were accelerated due to domestic weakness.
**3. Impact on Currency Markets**
– The US dollar (USD) exhibited relative strength for much of the year, as robust economic data and Fed messaging underpinned a hawkish stance.
– The euro (EUR) and pound sterling (GBP) faced headwinds as growth data disappointed and the ECB and BoE delivered dovish surprises in late 2025.
– Commodity currencies—Australian dollar (AUD), New Zealand dollar (NZD), and Canadian dollar (CAD)—benefited from an improved commodity price environment and resilient domestic demand, particularly in the latter half of the year.
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### Geopolitical Influences and The 2025 Currency Narrative
**1. Political Risk and Event Risk**
– US presidential elections in November 2024 set the tone for ongoing uncertainty into 2025, shaping expectations around fiscal policy, tariffs, and trade relations.
– The conflict in Ukraine and instability in the Middle East led to periods of risk aversion, with safe-haven flows benefiting the USD and Swiss franc (CHF).
– Emerging market currencies, particularly those with exposure to conflict zones or reliant on fragile trade ties, suffered significant volatility.
**2. Policy Uncertainty and Market Reaction**
– With shifting political landscapes,
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