Westpac targets 1.22 for EUR/USD and $1.41 GBP/USD (long horizon)

Westpac says global growth rotation may weigh on the dollar.

Summary:

• Westpac sees dollar drifting lower, with risks skewed to the downside.

• US growth expected above trend in 2026, driven by consumers and tech investment.

• Inflation pressures likely to persist, limiting Fed rate cuts to one more move.

• Euro and sterling forecast to outperform, reaching $1.22 and $1.41 by mid-2027.

• Asia currencies also seen strengthening, led by gradual renminbi gains.

Westpac says the US dollar is likely to edge lower over the next 12 to 18 months, even though the bank remains constructive on the US economic outlook.

The dollar rallied from 97.9 in late December to 99.4 in mid-January before reversing sharply to a near four-year low of 96.2. It is currently trading around 97.0 — roughly 15% below its mid-2022 peak and about 1.5% beneath its 10-year average. Westpac’s baseline view is that the dollar will settle somewhere between current levels and its 20-year average, but risks are skewed to the downside.

Importantly, Westpac is not bearish on the US economy. The bank expects another year of above-trend growth in 2026, led by resilient consumer spending and continued investment in technology infrastructure. It anticipates the labour market will remain effectively fully employed, with wage growth continuing to outpace inflation.

However, Westpac argues that inflation risks remain elevated. Capacity constraints across housing, transport, energy and healthcare, alongside the lagged effects of tariffs, are likely to keep price pressures above the Federal Reserve’s 2% target. This underpins its expectation for only one additional rate cut from the Federal Open Market Committee, a more cautious stance than current market pricing for at least two cuts this year.

So why the softer dollar outlook? Westpac points to improving opportunities elsewhere. It argues that the strong run in US equities may limit further relative outperformance, while growth narratives in Europe and Asia are increasingly focused on structural expansion rather than trade risks.

The bank expects the euro to rise toward $1.22 and sterling toward $1.41 by mid-2027. It sees more gradual gains for the Canadian dollar and yen, and anticipates further appreciation in the renminbi as Asia’s growth prospects strengthen.

• USD/CAD projected to ease to 1.34 by mid-2027 and 1.30 by mid-2028
• USD/JPY 145 by end-2026 and 139 by mid-2028
• USD/CNY seen advancing toward 6.35 over the next two years