Last week, global financial markets exhibited a divergent pattern: US stocks closed steadily higher, crude oil prices fluctuated moderately, precious metals rebounded strongly, the US dollar remained weak, and bond yields fluctuated slightly.

Notably, the precious metals market performed exceptionally well last week, with gold and silver prices hitting record highs. Spot gold broke through $4,500 per ounce, with a year-to-date increase of over 60%. Silver prices also performed strongly, surging 10% in a single day on December 26th, and rising over 170% for the year, demonstrating the fervent sentiment in the precious metals market.

The escalation of geopolitical risks, with the simultaneous unfolding of three major geopolitical risks—the US-Venezuela standoff, the potential conflict between Iran and Israel, and the Russia-Ukraine conflict—fueled global risk aversion, further highlighting the "safe haven" status of precious metals.

The foreign exchange market last week saw a weakening US dollar and generally stronger non-US currencies. The US dollar index fell nearly 1.5% in December, with a year-to-date decline of 9.61%, its worst annual performance since 2017. Behind this shift lies a profound adjustment in global capital flows, with funds moving from dollar assets to other markets seeking higher returns.

A rare phenomenon occurred in 2025: oil prices fell by more than 10% throughout the year, yet energy stocks rose—the first such divergence this century. One key factor in this divergence was the Trump administration's energy policies, which made fossil fuel extraction more profitable.

The Christmas holidays have a significant seasonal impact on global financial markets. With reduced trading volume, even relatively small trades can "prick" multiple price levels, leading to volatility that would be impossible with normal trading volumes. This phenomenon is particularly evident in the precious metals market, with the sharp fluctuations in gold and silver prices partly attributed to the low liquidity environment during the holidays.

In this era of uncertainty, the only certainty is change itself. Investors need to remain vigilant, continuously learn, and improve their investment capabilities. Only in this way can they remain invincible in a complex and volatile market. Remember Warren Buffett's famous quote: "Be greedy when others are fearful, and fearful when others are greedy"—this is especially relevant in the current market environment.

Last Week's Market Performance Review:

Funds flowed back after the Christmas holidays, and US stocks continued their year-end strength. Over the weekend, the S&P 500 hit a new record high and approached the 7,000-point mark, ultimately recording a weekly gain despite a slight pullback at the close. All three major US stock indexes closed slightly lower, ending a five-day winning streak, but still recorded gains for the week. A short-term "breathing out" after a strong post-holiday rally is normal. At the close on Friday, the S&P 500 fell 0.03% to 6,929.94 points, after rising as much as 0.2% to a record high of 6,945.77 points during the session; the Nasdaq Composite fell 0.09% to 23,593.10 points; and the Dow Jones Industrial Average dropped 0.04% to close at 48,710.97 points. Looking at weekly performance, the S&P 500 rose 1.4% this week, marking its fourth weekly gain in the past five weeks; the Dow Jones and Nasdaq also rose by more than 1% this week, indicating that the overall market is still pushing upwards towards the end of the year.

Gold maintained its strength last week. Spot gold rose more than 4.4% for the week to $4,531 per ounce, hitting a record high of $4,549.70 during the session; meanwhile, COMEX February gold futures rose 1.3% to $4,559, continuing to consolidate its historical high range. The market generally believes that gold is poised for its strongest annual gain since 1979. Its upward momentum stems from the Fed's policy shift, continued buying by global central banks, inflows into gold ETFs, and the continued progress of the "de-dollarization" trend. The next key target for gold is $4,686.80, and it is expected that "$5,000 may appear in the first half of next year."

At the end of last week, the precious metals market witnessed a historic moment: spot silver broke through $77 per ounce for the first time in history, while gold and platinum simultaneously hit record highs. Amid market bets on further interest rate cuts by the Federal Reserve in 2026, a weakening dollar, and escalating geopolitical tensions, safe-haven funds continued to flow in, driving precious metals to accelerate their rise in a year-end liquidity-scarce environment. This surge not only continues traditional safe-haven trading but also reflects a comprehensive increase in demand for hard assets in the context of de-dollarization and tight supply structures. Silver broke through $78, soaring approximately 170% year-to-date, with supply gaps and key mineral labels fueling its popularity.

Data shows that spot silver surged over 10% on Friday to $79.307 per ounce, hitting a record high, with its year-to-date gain expanding to nearly 170%. Before the end of last week, the dollar index rebounded sharply, triggering a bullish counterattack. Despite a larger-than-expected drop in CPI last week, the dollar index did not fall, becoming a buy signal for bullish traders. The dollar index rebounded the following day and is currently trading around 98.72, up 0.28%. Meanwhile, the Bank of Japan's negative real interest rate and less hawkish comments this morning further fueled the dollar index's rise. On the other hand, the market did not rush to bet on a significantly dovish shift in the Federal Reserve's policy path, allowing the dollar index to stabilize quickly after its initial sharp decline, exhibiting a phenomenon where negative news did not lead to a significant drop.

Globally, the dollar has continued to be under pressure after a significant weakening throughout the year. Although it rebounded to around 98.00 last week, it remains hovering in the low range since early October, with a cumulative decline of 9.7% this year, heading towards its worst annual performance since 2017. After breaking through its lows, the dollar hoped to rebound and form a reversal pattern, but the pattern was interrupted by cross-currency selling, and it has not yet been successfully formed. If it cannot quickly recover the 98 level in the near future, the dollar may continue to decline.

The euro/dollar pair consolidated below 1.1800 during the Christmas period. After two consecutive days of gains, the euro/dollar pair struggled to find direction and traded within a narrow range below 1.1800. The Christmas holiday period kept trading activity subdued. Trading was thin last week due to the Christmas holidays, with the dollar rising slightly by 0.56% to close at 1.1775. The yen strengthened against the dollar last week, with USD/JPY erasing all gains made on the day of the Bank of Japan's policy announcement, falling back to near 156.00. Investors were optimistic about the Bank of Japan's monetary tightening policy outlook. The market expects the Federal Reserve to cut interest rates by at least 50 basis points next year. On the other hand, the dollar rose 0.76% to 156.50 for the week as investors focused on possible intervention by Japanese authorities to support the yen.

The pound retreated slightly against the dollar last week but remained near two-month highs. The recent strength of the pound, with GBP/USD climbing to 1.3517, its highest level since October 1st, perfectly illustrates the market logic of "buy the rumor, sell the fact"—once "interest rate cuts" become the consensus, the key question becomes "how quickly the rate cuts will happen." The pound rose 0.97% for the week, closing at 1.3505. The Australian dollar climbed above US$0.6700 last week, its highest level since October last year, driven by market expectations of a rate hike by the Reserve Bank of Australia (RBA). The latest RBA meeting minutes showed that the board was prepared to tighten policy if inflation did not slow as expected, focusing on the fourth-quarter CPI report to be released on January 28. The dollar rose more than 1.50% for the week, closing at US$0.6715.

Last week, the crude oil market declined to below approximately US$57.00 per barrel in thin trading ahead of/after the Christmas holidays. Geopolitical uncertainties failed to change the fundamental oversupply situation; oil prices rose and then fell last week. While geopolitical factors provided short-term support, they did not change the fundamental situation of oversupply. Despite recent geopolitical support and solid US economic data, WTI crude oil is still facing its biggest annual drop since 2020, falling by about 18%, as most major traders expect a global oil surplus next year due to increased production from both OPEC+ and other sources.

Since hitting its all-time high in October, Bitcoin and crypto assets as a whole have seen a significant pullback, while gold, silver, and US stocks have accelerated their upward trend towards the end of the year, presenting a rare "split" market. Currently, Bitcoin's price is hovering around $90,000, a significant drop from its all-time peak of approximately $126,000 in October. This stagnation has led to a reassessment of whether Bitcoin is a "risk asset" or a "hard asset." Entering 2026, the market will focus on the Federal Reserve's policy path, the dollar's trend, the evolution of geopolitical risks, and whether the crypto market will see a new round of recovery in valuation and funding.

The yield on the 10-year US Treasury note rose to approximately 4.15% on Friday, reversing Wednesday's decline, as investors continued to weigh the Federal Reserve's policy outlook. Market pricing currently suggests two more rate cuts next year. The median forecast from policymakers indicates only one rate cut in 2026.

Market Outlook This Week: This week (December 29th - January 2nd) marks a crucial juncture between the year-end closing and the new year's start, with global markets experiencing a flurry of data releases and interwoven policy signals.

From Chinese industrial enterprise profit data to manufacturing PMIs from multiple countries, from the Federal Reserve meeting minutes to a major new energy industry event, a multitude of events will unfold, covering both core indicators reflecting economic fundamentals and key meetings influencing industry trends, potentially triggering structural market volatility. Investors need to focus on core data and policy developments, plan their strategies in advance, and capitalize on the risks and opportunities at the end of the year and the beginning of the new year.

As a "collective report card" reflecting the global economic climate, the divergence in PMI strength across countries will directly impact risk asset sentiment—a general rebound in PMIs from major economies could boost global stock markets and commodity currencies; continued weakness could strengthen risk aversion.

Investors should pay attention to trading rules during the New Year holiday to prepare for potential market volatility and opportunities.

Regarding risks this week:

Risk Warning: Four Key Variables to Watch

Besides core economic data, investors should be wary of four potential risks:

First, escalating geopolitical conflicts (such as the Russia-Ukraine conflict and the Israeli-Palestinian conflict) and domestic political changes in some countries may trigger increased risk aversion, benefiting safe-haven assets such as gold and the US dollar;

Second, policy shift signals from major central banks such as the Federal Reserve and the Bank of Japan may rapidly correct market interest rate expectations, causing short-term volatility in exchange rates and bond markets;

Third, international trade frictions or changes in industrial policies, especially policy adjustments in emerging industries such as green hydrogen, may impact the valuations of related sectors;

Fourth, the tightening of liquidity at the end of the year may exacerbate market liquidity volatility; Fifth, weaker-than-expected global manufacturing PMIs may trigger selling pressure on risky assets.

This Week's Conclusion:

As 2025 draws to a close, global financial markets appear prosperous, but a chill can be felt beneath the surface because the rise in many assets is the result of previous sharp declines. Although the Federal Reserve implemented its third consecutive interest rate cut earlier this month, investors have not celebrated a "phase victory" in the fight against inflation.

Looking ahead, global financial markets will enter a new phase. Diverging policies among major central banks, rising geopolitical risks, and changes in the dollar system will all have a profound impact on the market. Investors need to adapt to these changes, adjust their investment strategies, and find a balance between risk and return.

Investors should closely monitor inflation data for January and February 2026 to observe whether the "tariff transmission effect" begins to manifest in final consumer prices. The resilience of the labor market and the direction of the 10-year US Treasury yield will be key indicators of whether the Federal Reserve can successfully achieve a soft landing or is about to initiate a more tightening shift.

At this stage, the key word for the market in the coming months is undoubtedly "caution"—global financial markets are rapidly adapting to a new landscape where 3.5% is the new floor for interest rates, not a ceiling.

2026 Euro/USD Outlook

In 2026, the Euro/USD exchange rate is expected to fluctuate with a slight upward bias, with a high at the beginning and a stable later trend. The core drivers are the divergence in monetary policies between Europe and the US and differences in economic fundamentals. The central range for the year is likely to be 1.16-1.20.

Key Scenario:

Based on a comprehensive analysis of the divergence in monetary policies between Europe and the US, differences in economic fundamentals, and market technical structures, the author makes the following key predictions regarding the EUR/USD exchange rate in 2026:

Baseline Scenario (60% probability): The EUR/USD exchange rate will fluctuate between 1.16 and 1.20, with a central level around 1.18. This prediction is based on a policy mix where the Federal Reserve cuts interest rates only 1-2 times in 2026, the European Central Bank maintains its interest rates or makes minor adjustments, and the fundamental situation where the economic growth gap between Europe and the US narrows but still exists.

Optimistic Scenario (25% probability): If the European Central Bank maintains a hawkish stance, the Federal Reserve accelerates interest rate cuts, or the US economy slows significantly, the EUR/USD exchange rate may break through 1.20 and extend into the 1.23-1.30 range, with 1.25 and 1.30 being key resistance levels.

Cautious Scenario (15% probability): If the Fed's rate cut is less than expected, Eurozone economic growth slows significantly, or geopolitical risks escalate, the euro/dollar exchange rate may fall back to the 1.10-1.15 range, with 1.12 and 1.15 being key support levels.

Key Drivers (Ranked):

Monetary Policy Divergence (40% weight): The difference in policy paths between the Fed and the ECB is the most critical factor driving exchange rate movements. The Fed is expected to cut rates only 1-2 times in 2026, while the ECB may maintain its current rate or raise it slightly. This divergence will support the euro/dollar exchange rate.

Economic Fundamentals Divergence (30% weight): US economic growth is projected to slow from 2.5% in 2025 to 2.0-2.3% in 2026, while Eurozone economic growth is projected to rise slightly from 1.3% to 1.2-1.4%. This narrowing economic gap is conducive to a stronger euro.

Market Sentiment and Technical Factors (Weight 20%): CFTC positioning data shows net long positions in the Euro around 100,000-130,000 contracts, indicating that bullish sentiment towards the Euro remains dominant. Technically, the Euro/USD pair has found solid support around 1.17, with the moving average system showing a bullish alignment.

Geopolitics and Risk Appetite (Weight 10%): Factors such as the Russia-Ukraine conflict, the Middle East situation, and US-China trade relations may trigger risk aversion, providing temporary support for the US dollar, but the medium- to long-term impact is relatively limited.

Economic Fundamentals and Fiscal Policy Impact:

Eurozone Economic Recovery Prospects and Structural Reforms

The Eurozone economy faces a prospect of moderate recovery in 2026. According to the latest forecast from the European Central Bank, Eurozone GDP growth is expected to be 1.2% in 2026, slightly lower than the 1.4% in 2025, but still maintaining positive growth. Quarterly data shows a gradual improvement in the Eurozone economy. Germany's economic growth is projected to be 0.8% in 2026 and 1.1% in 2027, both downward revisions of 0.5 percentage points from previous forecasts.

France's economy performed relatively well, with the French National Institute of Statistics and Economic Studies (INSEE) projecting 0.9% economic growth in 2025, slightly lower than the 1.1% in 2024. However, its third-quarter GDP grew by 0.5% quarter-on-quarter, placing it among the better performers in the Eurozone. Spain continued its strong growth, with third-quarter GDP increasing by 0.6%, thanks to solid household spending and robust investment.

US Economic Growth Momentum and Fiscal Sustainability

The US economy faces the challenge of slowing growth momentum in 2026. US economic growth is expected to slow from around 3% in 2025 to 2.0%-2.3% in 2026. This slowdown is primarily influenced by the following factors:

First, consumer spending growth may slow due to a weak labor market. The unemployment rate rose to 4.6% in November, and the U6 unemployment rate reached 8.7%, indicating increased pressure in the labor market.

Second, business investment growth may be restrained by relatively high interest rates. Despite the Federal Reserve's 75 basis point rate cut, the 3.50%-3.75% interest rate level remains high.

Regarding fiscal policy, the US faces increasingly severe challenges to debt sustainability. The US national debt has exceeded $35 trillion, and the debt-to-GDP ratio continues to rise. Against this backdrop, the US government's fiscal policy space is limited, making it difficult to support economic growth through large-scale fiscal stimulus.

Conclusions and Outlook:

Key Conclusions for the Euro/USD Exchange Rate in 2026

Based on a comprehensive analysis of the divergence in monetary policies between the US and Europe, the evolution of economic fundamentals, market technical structures, and geopolitical risks, we make the following key judgments regarding the Euro/USD exchange rate in 2026:

The Euro/USD exchange rate will exhibit a volatile but generally strong trend in 2026, with a central range of 1.16-1.20. This judgment is based on the following key factors:

1) Monetary policy divergence is the core driving force: The Federal Reserve is expected to cut interest rates 1-2 times in 2026, while the European Central Bank is likely to maintain its interest rates unchanged. The narrowing interest rate differential between the US and Europe will provide structural support for the Euro. 2) Narrowing gap in economic fundamentals: US economic growth forecasts have slowed from 3% to 2.0%-2.3%, while Eurozone growth is projected at 1.2%, still lower than the US, but the gap is narrowing.

3) Technical support for a rise: The euro/dollar exchange rate has found solid support around 1.17, with moving averages showing a bullish alignment, and CFTC positioning data indicating a dominant bullish sentiment towards the euro.

4) Manageable geopolitical risks: Although uncertainties remain regarding the Russia-Ukraine conflict and the Middle East situation, a significant deterioration is not expected, limiting the negative impact on exchange rates.

The expected trend for the whole year is "rising first, then falling, and then stabilizing":

First half of the year (January-June): Driven by expectations of a Fed rate cut and a hawkish stance from the ECB, the euro/dollar exchange rate is expected to rise from 1.17 to the 1.20-1.22 range.

Second half of the year (July-December): A high-level consolidation is expected, with wide fluctuations within the 1.18-1.22 range, potentially closing near 1.20 by the end of the year.

My view:

I am relatively optimistic about the euro/dollar exchange rate, with a 12-month target price of 1.25, including a 3-month target price of 1.17 and a 6-month target price of 1.20. The core logic is the slowdown in US economic activity and a shift in global investor interest. I believe the Fed will maintain a dovish stance, while other major central banks (such as the Bank of Japan and the Reserve Bank of Australia) will maintain a hawkish or at least less dovish stance. This policy divergence will drive the dollar weaker.

In summary, the Euro faces a historic opportunity against the US Dollar in 2026. Factors such as the divergence in monetary policies between the US and Europe, converging economic fundamentals, and evolving geopolitical landscape are all creating conditions for a stronger Euro. Investors should seize this historic opportunity while managing risk effectively, seeking opportunities amidst volatility and profiting from trends.

2026 Outlook for USD/JPY

The USD/JPY exchange rate in 2026 is expected to exhibit a pattern of "stronger fluctuations in the first half of the year, followed by a weakening trend in the second half." The core driver is the difference in the pace of US-Japan monetary policy and the narrowing interest rate differential. The exchange rate center is likely to be in the 150-155 range. Japanese intervention and geopolitical risks will bring short-term volatility. The narrowing divergence in monetary policies between the Federal Reserve and the Bank of Japan is the core driving factor, and the US-Japan interest rate differential is expected to gradually narrow from the current 2.2% to the 1.5%-1.8% range.

Based on the latest policy expectations, the Federal Reserve is projected to cut interest rates once to 3.4% in 2026, while the Bank of Japan will continue its gradual rate hikes 1-2 times to 1.0%-1.25%. This will likely drive the USD/JPY pair to fluctuate within the 152-156 range in the first half of the year, before falling back to the 145-150 range in the second half, with a year-end target price of 145-148.

Key risks include the Japanese government's intervention risk in the 158-162 range, safe-haven demand due to escalating geopolitical conflicts, and the constraints on monetary policy caused by Japan's deteriorating fiscal situation. Investors are advised to buy on dips in the first half of the year and sell on rallies in the second half, focusing on interest rate differential inflection points.

2026 USD/JPY Phased Outlook:

Looking further ahead, the USD/JPY exchange rate will continue to be influenced by multiple factors, including the economic fundamentals, monetary policies, and fiscal situations of both the US and Japan. With the continued recovery of the Japanese economy and the progress of monetary policy normalization, the yen is expected to maintain an appreciation trend in the medium to long term.

First Quarter (January-March): A Volatile but Slightly Strong Trend

In the first quarter of 2026, the USD/JPY exchange rate is expected to fluctuate with a slight upward bias within the 152-156 range. This assessment is based on several key factors:

Uncertainty surrounding the Federal Reserve's policy expectations is a significant factor supporting the dollar. Meanwhile, the Fed's December meeting statement hinted at a possible slowdown in future rate cuts, providing additional support for the dollar.

The Bank of Japan's cautious stance limits the yen's upside potential. Although the Bank of Japan has raised interest rates to 0.75%, Kazuo Ueda's relatively cautious statements at the press conference will limit the yen's appreciation momentum.

Seasonal factors and the inertia of carry trades support the dollar. The first quarter is typically a peak period for Japanese companies to conduct overseas investment and M&A, resulting in relatively weak demand for the yen. At the same time, despite the narrowing of the USD/JPY interest rate differential, the inertia of carry trades will continue to support the dollar.

Second Quarter (April-June): Interest Rate Spread Narrowing Begins

The second quarter will be a turning point for the USD/JPY exchange rate, which is expected to fluctuate within the 150-154 range, with the central point gradually shifting downwards.

The increasing clarity of expectations for a Fed rate cut will put pressure on the dollar. Meanwhile, the continued weakness in the US labor market will provide more justification for a Fed rate cut.

Rising expectations of a Bank of Japan (BOJ) rate hike will support the yen. The market expects the BOJ to raise rates again in April or June, bringing the policy rate to 1.0%. Especially considering that the results of the spring labor negotiations (Shunto) will be announced in April-May, stronger-than-expected wage growth will provide stronger support for a BOJ rate hike.

The rapid narrowing of the USD/JPY interest rate differential will be the dominant factor. It is expected that by the end of the second quarter, the spread between the yields on 10-year US and Japanese government bonds will narrow from the current 2.2% to a range of 1.8%-2.0%. This narrowing of the interest rate differential will directly weaken the support for USD/JPY, pushing the exchange rate central point downwards.

Third Quarter (July-September): Yen's Trend of Strengthening Begins

The USD/JPY exchange rate is expected to enter a clear downward channel in the third quarter, with a range of 145-150, and the yen's trend of strengthening will begin to emerge.

The Fed's rate cut will directly weaken the dollar. Assuming the Fed cuts rates by 25 basis points as expected in June, the dollar will face significant downward pressure. Simultaneously, if US economic data continues to be weak, the market may begin pricing in expectations of another Fed rate cut in September, which will further depress the dollar.

The Bank of Japan's rate hike will provide strong support for the yen. If the Bank of Japan raises rates to 1.0% in July or September, the USD/JPY interest rate differential will quickly narrow to below 1.5%. Historical experience shows that when the USD/JPY interest rate differential is below 1.5%, the yen usually experiences a significant appreciation trend. Large-scale unwinding of carry trades will accelerate the yen's appreciation.

Fourth Quarter (October-December): Strong Yen Expected

The USD/JPY exchange rate is expected to continue its downward trend in the fourth quarter, trading within a range of 140-148, with a year-end target price of 145-148.

Further narrowing of the USD/JPY interest rate differential will be the main driver. It is projected that by the end of the fourth quarter, the spread between the US and Japanese 10-year government bond yields will narrow to below 1.5%, potentially approaching 1.2% at times. This level of differential will give the yen a significant valuation advantage.

Geopolitical risks may provide additional support for the yen. The fourth quarter may see political events such as the US midterm elections. If political uncertainty increases, safe-haven demand will drive funds into the yen. Simultaneously, geopolitical factors such as US-China relations and the Taiwan Strait situation may also change by the end of the year, providing safe-haven buying opportunities for the yen.

Geopolitical Risks and Safe-Haven Demand:

Geopolitical risks are a significant external factor influencing the USD/JPY exchange rate, with complex and unpredictable mechanisms. The current geopolitical landscape is characterized by multi-point tensions. The Russia-Ukraine conflict continues, tensions between Israel and Iran in the Middle East escalate intermittently, and uncertainties remain regarding the Taiwan Strait situation and the Korean Peninsula issue in East Asia. These geopolitical hotspots may see new developments in 2026, impacting exchange rates.

The Japanese yen's safe-haven appeal varies under different circumstances. Traditionally, the yen is considered a safe-haven currency and typically receives buying support during periods of geopolitical tension. In December 2025, escalating tensions between the US and Venezuela, concerns about a renewed Israel-Iran conflict, and the continued uncertainty stemming from the Russia-Ukraine conflict led to a surge in safe-haven funds, pushing the yen higher. However, the effectiveness of the yen's safe-haven status is constrained by multiple factors. First, the Japanese economy is highly sensitive to the external environment, and geopolitical conflicts could negatively impact it through trade channels. Second, Japan's government debt problem may weaken the yen's safe-haven appeal. Third, the US-Japan alliance may put pressure on the yen in certain geopolitical scenarios.

My View:

I personally predict that the USD/JPY exchange rate will fall to around 140 in the first quarter of 2026, a drop of about 10% from current levels, before rebounding to around 147 by the end of the year. As the exchange rate reverts to its fair value implied by interest rates, coupled with a decline in the fair value itself due to falling US interest rates, the USD/JPY may fall by nearly 10% in the coming months. Japan's fiscal policy is not particularly loose, which provides support for the yen.

The USD/JPY exchange rate will experience a significant turning point in 2026, shifting from the strong dollar of the past few years to a new phase of gradual yen strengthening. The core driver of this shift is the convergence of the divergence between US and Japanese monetary policies, with the US-Japan interest rate differential expected to narrow from the current 2.2% to a range of 1.5%-1.8%.

2026 GBP/USD Exchange Rate Outlook

The GBP/USD exchange rate is highly likely to exhibit a range-bound movement in 2026, with a lower start and a higher finish. The core drivers are the divergence in the pace of interest rate cuts by the Bank of England and the Federal Reserve, the divergence in economic fundamentals, and fiscal risks. The full-year average is projected to be 1.29-1.32, potentially converging towards an equilibrium level of 1.31 by the end of the year.

2026 Core Assumptions and Forecasts

The core forecast for the GBP/USD exchange rate in 2026 is based on the following four assumptions:

Monetary Policy Divergence Assumption: The Bank of England is expected to cut interest rates 2-3 times in 2026, totaling 61 basis points, bringing the final interest rate to 3.0%-3.25%; the Federal Reserve is expected to cut rates 2 times, totaling 50 basis points, bringing the final interest rate to 3.00%-3.25%. The market expects the Bank of England to cut rates faster than the Federal Reserve, and this expectation gap will put pressure on the pound in the first half of the year.

Economic Fundamentals Assumptions: UK economic growth will remain weak, with GDP growth projected at 1.1%-1.5% in 2026, lower than the US's 2.0%-2.3%. However, UK inflation is expected to decline more rapidly, approaching the 2% target by the end of 2026, while US inflation remains somewhat sticky.

Fiscal Policy Assumptions: The UK government will fill a fiscal gap of approximately £20 billion through tax increases, with the £26.1 billion tax increase plan introduced in the autumn budget to be implemented gradually. The credibility of these fiscal consolidation measures will affect market confidence in the pound.

Geopolitical Assumptions: 2026 marks the 10th anniversary of the Brexit referendum and the five-year review period for the Trade and Cooperation Agreement (TRAI), while the Fisheries Rights Agreement will also expire. Although the importance of Brexit has diminished, related negotiations may still have a short-term impact on the exchange rate.

Economic Fundamentals: Divergence in Growth and Inflation Between the UK and the US

UK Economic Growth Outlook: The UK economy is expected to perform weakly in 2025, with Q3 GDP growth at only 0.1% quarter-on-quarter, down from 0.3% in Q2. More worryingly, the Bank of England has lowered its Q4 2025 GDP growth forecast from 0.3% to zero. Full-year 2025 growth is projected at 1.5%, a downward revision from previous forecasts.

Looking ahead to 2026, several institutions hold a cautious view on UK economic growth. They predict a 1.1% GDP growth rate for 2026, primarily due to weak consumer spending and sluggish investment. The Office for Budget Responsibility (OBR) expects the growth rate to rebound to 1.9% in 2026, but then remain between 1.7% and 1.8% between 2027 and 2029.

My personal forecast for UK economic growth in 2026 is 1.4%, but I emphasize that this forecast carries downside risks.

US Economic Growth Outlook: The US economy demonstrated strong resilience in 2025, with Q4 GDP growing at an annualized rate of 2.4%, lower than Q3's 3.1%, but still above potential growth levels. Personal consumption expenditure grew by 4.2%, far exceeding market expectations of 3.2%, becoming the main driver of economic growth.

According to the Federal Reserve's December 2025 economic projections, US GDP growth in 2026 is expected to be 2.3%, higher than the 1.7% in 2025. This projection reflects the Fed's confidence in a soft landing for the US economy. However, some institutions hold a more cautious view; this author predicts US economic growth of 1.8% in 2026, mainly affected by factors such as student loan burdens, tightening immigration policies, and a frozen housing market.

2026 Phased Market Outlook:

Q1 (January-March): Pressure from Bank of England's Initial Rate Cut

In the first quarter of 2026, the pound/dollar exchange rate will be primarily influenced by the Bank of England's (BOE) initial rate cut. Market expectations suggest the BOE may implement rate cuts in January or February.

Q2 (April-June): Continued Policy Divergence

In the second quarter of 2026, the policy divergence between the Bank of England and the Federal Reserve will continue, but the degree may ease. The BOE is expected to implement its third rate cut in April or June, while the Federal Reserve may begin its rate-cutting cycle in March or May. The market will closely monitor the policy guidance of both central banks, particularly their statements regarding the path of rate cuts in the second half of the year.

In the UK, the local elections on May 5th will be a key focus. A Labour Party defeat could exacerbate political uncertainty. In the US, the Federal Reserve may confirm its rate-cutting path at its May meeting. If US economic data shows signs of recession, the Fed may accelerate its rate cuts, narrowing the policy divergence with the BOE.

Third Quarter (July-September): Accelerated Fed Rate Cuts

In the third quarter of 2026, with increasing signs of a slowing US economy, the Federal Reserve may accelerate its rate cuts, narrowing the policy divergence with the Bank of England. The market expects the Fed to cut rates by 25 basis points each in July and September, totaling 50 basis points.

In the UK, summer is typically a relatively quiet period for political activity. However, the second-quarter GDP data will be released in July, with the market expecting growth of around 0.3%. Inflation may have already approached the 2% target, providing the Bank of England with a reason to pause rate cuts.

Global risk appetite may recover somewhat in the third quarter, especially if geopolitical tensions ease. This would benefit risk assets and support the pound.

Fourth Quarter (October-December): Convergence to Equilibrium

In the fourth quarter of 2026, as the rate-cutting cycles of the Bank of England and the Bank of England near their end, market focus will shift to the relative performance of economic fundamentals. Interest rates in both countries are likely nearing the terminal level of 3.0-3.25%, weakening the marginal impact of monetary policy on exchange rates.

In the US, the midterm elections are likely in November, and political uncertainty could affect the dollar. A Democratic victory could mean more accommodative fiscal policy, which would be detrimental to the dollar. December: Year-end markets typically focus on the outlook for the following year. If economic growth expectations in both countries stabilize, the pound/dollar exchange rate may find equilibrium in the 1.31-1.32 range. According to the Behavioral Equilibrium Exchange Rate (BEER) model, this level is close to the long-term equilibrium value of the pound.

My View:

I personally expect the pound to climb from its current level below $1.35 to $1.45 by mid-2026, a level last reached before the 2016 Brexit referendum. My core logic is that the dollar will weaken significantly, potentially falling by as much as 5% in the first half of 2026. The core driver of global markets will shift from combating inflation to supporting growth, with the US interest rate cut cycle and China's anti-involution supply-side reforms resonating.

2026 will be a challenging year for the British pound against the US dollar, with policy divergence, a weak economy, fiscal pressure, and political uncertainty all converging. Investors need to remain cautious, adopt sound trading strategies, and strictly control risk. At the same time, they should recognize that extreme market sentiment often breeds opportunities; when the market is overly pessimistic, it may be a good time to position themselves.

In this era of uncertainty, the only certainty is change itself. Successful investors need keen insight, strict discipline, and flexible adaptability. We hope this report will provide valuable reference for your investment decisions.

We wish investors ideal returns in their investment journey in 2026.

2026 Offshore RMB Outlook

The offshore RMB exchange rate against the US dollar is likely to show a pattern of "moderate appreciation and range-bound fluctuations" in 2026. The core fluctuation range is expected to be 6.8-7.3, with the year-end center possibly around 7.0. A one-sided surge or plunge is unlikely, and the central bank's exchange rate stabilization policy will suppress the risk of overshooting.

Offshore vs. Onshore Exchange Rate Spread

The spread between the offshore and onshore RMB exchange rates (CNH and CNY) is an important indicator reflecting differences in the RMB exchange rate market structure and expectations. Since 2025, the CNH vs. CNY spread has generally remained within a reasonable range, but significant fluctuations have occurred during certain periods.

During the escalation of the US-China trade friction in April, the offshore RMB exchange rate depreciated significantly faster than the onshore exchange rate, with CNH depreciating by more than 500 basis points against CNY at one point, reflecting the offshore market's greater sensitivity to trade risks. This is mainly due to the more diversified structure of participants in the offshore market, including more international investors and speculative funds, leading to a more rapid response to geopolitical risks.

The driving factors behind price spreads mainly include the following: First, cross-border arbitrage costs, including funding costs and exchange rate risk hedging costs; second, differences in market expectations, particularly differing assessments of factors such as the US-China interest rate differential, trade relations, and capital flows; third, differences in policy expectations, as the offshore market's understanding of China's monetary and exchange rate policies may differ from that of the onshore market; and finally, differences in market liquidity, as increased market volatility may lead to liquidity shortages in the offshore market, causing price deviations.

China's Economic Fundamentals and Policy Orientation

China's economic fundamentals are the fundamental factor determining the long-term trend of the RMB exchange rate. According to the latest forecast from the International Monetary Fund (IMF), China's economy will grow by 5.0% in 2025 and 4.5% in 2026. The World Bank's forecast is slightly lower, predicting China's economic growth of 4.9% in 2025 and 4.4% in 2026, both forecasts being revised upwards by 0.4 percentage points from their June forecasts.

From the perspective of economic growth structure, the main challenges facing the Chinese economy in 2026 include: continued adjustments in the real estate market, local government debt pressure, and uncertainty in external demand. Despite this, the Chinese economy has demonstrated strong resilience, particularly in areas such as exports, manufacturing investment, and new quality productivity.

Regarding monetary policy, the Central Economic Work Conference clearly stated that a moderately loose monetary policy will continue to be implemented in 2026, flexibly and efficiently utilizing various policy tools such as reserve requirement ratio (RRR) cuts and interest rate cuts. The market expects the central bank to implement a new round of RRR and interest rate cuts in the first quarter of 2026, with a higher probability of an RRR cut than an interest rate cut.

Regarding fiscal policy, a proactive fiscal policy is expected to continue in 2026, focusing on supporting technological innovation, infrastructure construction, and people's livelihood. Of particular note is that the implementation of "anti-involution" policies may impact price formation in some industries, thereby affecting inflation expectations. Multiple institutions predict that China's CPI will moderately rebound to around 0.5% in 2026, while the PPI decline will narrow, and is expected to turn positive in the second half of the year.

US-China Interest Rate Spread and Capital Flow Patterns

The US-China interest rate spread is a key variable influencing cross-border capital flows and exchange rate trends. As of mid-December 2025, the yield on 10-year Chinese government bonds was 2.4%, while the yield on 10-year US Treasury bonds was 3.2%, resulting in an inverted interest rate spread of approximately 80 basis points. This inverted spread puts some pressure on the RMB exchange rate, but the degree of inversion is expected to gradually narrow as the Federal Reserve's interest rate cut cycle progresses.

Looking ahead to 2026, the trend of the US-China interest rate spread will mainly depend on three factors: first, the pace and magnitude of the Federal Reserve's interest rate cuts; second, the monetary policy orientation of the People's Bank of China; and third, the relative changes in economic growth and inflation in the two countries. The market expects the Federal Reserve to cut interest rates by 50 basis points in 2026, while the People's Bank of China may cut rates by 10-20 basis points. Therefore, the inverted US-China interest rate spread is expected to narrow to within 50 basis points, which will significantly alleviate pressure on the RMB exchange rate.

Analysis of Offshore RMB Exchange Rate Trend in 2026:

Moderate Appreciation; Range-Bound Fluctuation

The offshore RMB exchange rate is expected to exhibit a pattern of "moderate appreciation and range-bound fluctuation" in 2026, with a core fluctuation range of 6.80-7.15 and a year-end central price level around 7.00. This judgment is based on the following key assumptions: the Federal Reserve cuts interest rates by 50 basis points as expected, the Chinese economy experiences a moderate recovery, Sino-US relations remain basically stable, and no systemic risks occur in the global financial markets.

Under this scenario, the exchange rate trend will exhibit distinct phased characteristics.

In the first quarter, influenced by the seasonal peak in foreign exchange settlement and expectations of a Federal Reserve interest rate cut, the offshore RMB is expected to break through 7.0, reaching the 6.95-7.00 range. The demand for foreign exchange settlement by enterprises and individuals is typically concentrated around the Spring Festival, coupled with market expectations of a possible Federal Reserve interest rate cut in March, which will drive the RMB exchange rate higher. The central bank may moderately guide the cooling down, preventing the exchange rate from appreciating too rapidly through methods such as adjusting the central parity rate.

The exchange rate is expected to enter a period of fluctuation from the second to the third quarter. As the peak of foreign exchange settlement subsides, exchange rate movements will depend more on economic fundamentals and policy expectations. Key variables during this period include: the performance of China's first-quarter economic data, the actual implementation of the Fed's interest rate cuts, the progress of Sino-US trade negotiations, and the divergence in global economic growth. The exchange rate is expected to fluctuate within a two-way range of 6.90-7.10, with the fluctuation range potentially widening to 3%-4%.

In the fourth quarter, if the Chinese economy shows resilience and the weakening trend of the US dollar continues, the exchange rate may converge towards the 6.80-6.90 range. Towards the end of the year, considering the seasonal factors of corporate foreign exchange settlements, the RMB may experience a wave of appreciation, but the central bank's exchange rate stabilization policy will prevent the exchange rate from deviating excessively from its equilibrium level.

Risk factors to watch include:

First, the pace of the Fed's interest rate cuts may be slower than expected, especially if US inflation rebounds;

Second, the strength of China's economic recovery may be weaker than expected, and the real estate market adjustment may continue;

Third, geopolitical risks may escalate in stages, affecting market sentiment;

Fourth, the US dollar may experience a stage of rebound, especially when uncertainty surrounding Fed policy increases. Looking ahead to 2026, with the advancement of RMB internationalization and the improvement of offshore market infrastructure, the exchange rate difference between CNH and CNY is expected to narrow further, remaining at a relatively stable level. In particular, with the expansion of CIPS (Cross-border Interbank Payment System) coverage and the increase in usage, the convenience of cross-border RMB transactions will significantly improve, helping to reduce the exchange rate difference between the two markets.

Author's View:

I personally predict that the RMB will appreciate to 6.7 against the USD by the end of 2026, and further to 6.5 in 2027. This forecast is based on an optimistic assessment of factors such as China's strong economic recovery, rapid RMB internationalization, and a significant weakening of the USD. It also reflects a relatively optimistic assessment of China's economic fundamentals, while also taking into account the impact of policy adjustments.

Overall, the opportunities for the offshore RMB exchange rate in 2026 outweigh the challenges. Against the backdrop of slowing global economic growth and a weakening USD, the RMB exchange rate is expected to remain relatively stable and appreciate moderately. However, investors still need to remain cautious, closely monitor various risk factors, and develop sound risk management strategies. We recommend a diversified investment strategy, with appropriate allocation to RMB assets to capitalize on long-term investment opportunities arising from RMB internationalization.

2026 Spot Silver Outlook

The metals market in 2025 was truly spectacular, with the entire sector significantly outperforming other risk assets, and silver undoubtedly the brightest star. By the end of the year, it not only doubled in price but also broke through historical highs to $78.650 (an increase of over 170%), far surpassing the performance of copper (up over 30%), gold (up over 60%), and platinum (up over 100%), firmly establishing itself as the dark horse of the year in the metals sector. This not only confirms silver's irreplaceable role in core industries but also dissects the underlying logic of its strong momentum breakout, providing investors with a highly valuable practical case study for understanding the relationship between trends and indicators.

As for 2026, spot silver is expected to exhibit a highly volatile trend of "first consolidation then breakout," with a price range of $60-80 per ounce throughout the year, averaging approximately $63-78. In the first half of the year, influenced by factors such as the Fed's policy maneuvering and the off-season for photovoltaic power, silver prices may fluctuate and consolidate within the $60-$65 range, even experiencing a 15-25% pullback. In the second half of the year, with the Fed's interest rate cuts taking effect and the peak season for photovoltaic installations starting, silver prices are expected to accelerate upwards, targeting $75-$80, and potentially reaching $80-$100 in an extremely optimistic scenario.

Supply and Demand Fundamentals: Structural Shortage Continues to Strengthen

The supply and demand fundamentals of the silver market exhibit a severe structural shortage, which is the fundamental driving force supporting the long-term rise in silver prices. According to the latest data, global silver demand is projected to reach 1.2 billion ounces in 2026, a year-on-year increase of 8%, while supply is projected to be only 1.05 billion ounces, a year-on-year increase of 3%, resulting in a supply-demand gap of 150 million ounces, a record high.

From the supply side, silver supply faces multiple constraints. First, 70%-80% of global silver production is a byproduct of lead, zinc, and copper mining, meaning miners cannot expand production capacity solely based on rising silver prices. This "byproduct" nature of silver production means that silver supply is slow to react to price changes. Global mined silver production in 2025 is only 820 million ounces, a 12% decrease from the 2020 peak.

Secondly, new mining projects are progressing slowly. While some new projects, such as the Crescent mine, are expected to add 1.4-1.6 million ounces of production annually, these projects typically take 5-10 years from planning to production. According to data from the World Bureau of Metal Statistics, in 2026, over 200 small and medium-sized silver mines worldwide will cease production due to excessively high costs, reducing silver production by approximately 3,000 tons, further exacerbating the supply shortage.

From the demand side, industrial demand is the core engine of silver demand growth. In 2026, industrial demand will account for over 65% of total silver demand, with photovoltaic demand accounting for approximately 55%, becoming the largest single source of demand. Demand from new energy vehicles: Each new energy vehicle uses approximately 80 grams of silver, four times that of traditional gasoline-powered vehicles. AI Data Center Demand: The explosive growth of AI data centers is creating new demand growth for silver. Data center electricity demand is projected to double by 2026 and quadruple by 2030. These facilities have a rigid demand for silver's high electrical and thermal conductivity.

China's Export Control Policy: A Major Change on the Supply Side

China's silver export control policy, implemented from January 1, 2026, is a major event impacting the global silver market. This policy will last at least until the end of 2027, forming a long-term, stable strategic control mechanism, rather than a temporary measure. This policy incorporates silver into the national strategic resource control framework on par with rare earths, tungsten, and antimony, marking a fundamental shift in China's understanding of silver's strategic value.

As the world's largest silver producer, China faces a severe shortage of spot silver, forcing many factories to pay premiums when purchasing it.

Gold-Silver Ratio: Huge Potential for Historical Mean Reversion

The gold-silver ratio is a crucial indicator of silver's relative value. Currently, the ratio is around 64-68, a significant drop from its peak of 105 in April 2025. Historically, the median gold-silver ratio has ranged between 40 and 80, with extremes exceeding 100 or falling below 30 proving unsustainable.

Historical data shows that after the gold-silver ratio surpasses 80, it typically returns to 55 within 23 months, during which time silver's average price increase is 240% (compared to gold's 67%). Based on Monte Carlo simulations, the probability of the gold-silver ratio returning to 55 before 2026 is 78%. After peaking in the gold-silver ratio in 1980, 2008, and 2020, silver outperformed gold by 387%, 210%, and 140%, respectively.

Considering silver's resilience driven by industrial demand, the gold-silver ratio is expected to converge further in 2026. If gold prices remain in the $4300-$4600 range and silver prices reach $55-$65, the gold-silver ratio will fall back to the 66-78 range.

If silver experiences a stronger rally (e.g., reaching $70), the ratio will converge to around 60, indicating significant room for further decline.

Risk Warning:

While the author is optimistic about the silver market in 2026, investors should pay close attention to the following risks:

Policy Risk: Uncertainty surrounding the Federal Reserve's monetary policy is the biggest risk. If inflation rebounds, leading to less-than-expected interest rate cuts, or if policy shifts to rate hikes, it will significantly impact silver prices.

Technological Risk: The rapid development of silver-reducing photovoltaic technology could significantly reduce silver demand. Investors need to closely monitor technological advancements, particularly the commercialization of alternative technologies such as silver-plated copper and electroplated copper.

Market Risks: The silver market is relatively small and susceptible to manipulation and speculation. Profit-taking at high levels, liquidity crises, and short squeezes can all trigger significant volatility.

Geopolitical Risks: While geopolitical tensions are generally beneficial for silver, an unexpected easing of risks or a global economic recession could be detrimental to silver prices.

Future Outlook:

Looking further into the future, the silver market faces profound structural changes:

Demand structure continues to optimize. With the accelerated global energy transition, the advancement of digitalization, and the rise of emerging industries, industrial demand for silver will maintain long-term growth. Particularly driven by carbon neutrality goals, the demand for silver from new energy industries such as photovoltaics, wind power, and energy storage will experience explosive growth.

Supply constraints are becoming increasingly prominent. The depletion of mineral resources, stricter environmental requirements, and rising mining costs will all limit the growth of silver supply. In particular, with China designating silver as a strategic resource, the global silver supply chain landscape will undergo fundamental changes. Silver's financial attributes are increasingly strengthened. Against the backdrop of global excessive money supply, rising inflationary pressures, and escalating geopolitical risks, silver's safe-haven and value-preserving functions will be re-evaluated. With the development of digital currencies, silver's status as "digital gold" will be further consolidated.

Technological advancements bring variables. The research and application of silver-reducing photovoltaic technology and alternative materials may have a disruptive impact on silver demand. Investors need to closely monitor technological developments and adjust their investment strategies accordingly.

Author's View:

2026 will be a year of both historic opportunities and challenges for the spot silver market. From a macroeconomic perspective, the start of the Fed's interest rate cut cycle, improved global liquidity, and declining real interest rates all provide strong support for silver prices. From a supply and demand perspective, the global silver supply-demand gap continues to widen, and the implementation of China's export control policies will further exacerbate supply shortages, while industrial demand from photovoltaics, new energy vehicles, AI data centers, and other sectors will maintain strong growth.

Based on my analysis, silver prices in 2026 will exhibit a "decline followed by a rise" trend. In the first half of the year, influenced by factors such as the Fed's policy maneuvering, the off-season for solar power, and profit-taking, silver prices may experience a 15-25% correction. In the second half of the year, with interest rate cuts implemented, demand surging, and supply tightening, silver prices are expected to accelerate their rise, potentially exceeding $80 in extreme cases.

From a medium- to long-term perspective, the investment value of silver cannot be ignored. The gold-silver ratio still has significant room for correction, structural growth in industrial demand provides solid support for silver prices, and changes in the global monetary system will enhance silver's strategic position. I maintain my "Outperform" rating on silver and recommend investors seize opportunities during corrections to actively position themselves.

In conclusion, the silver market in 2026 presents both opportunities and risks. Investors should remain rational, adopt scientific investment strategies, and effectively control risks while seizing opportunities. I believe that, guided by sound investment principles, silver investment will bring substantial returns to investors.

Overview of Important Overseas Economic Events and Matters This Week:

Monday (December 29): US November Pending Home Sales Index (MoM, %); US EIA Crude Oil Inventory Change (10,000 barrels) for the week ending December 19; Bank of Japan releases summary of opinions from December Monetary Policy Committee members.

Tuesday (December 30): Australia ANZ Consumer Confidence Index for the week ending December 28; US December Chicago PMI

Wednesday (December 31): US Initial Jobless Claims for the week ending December 22 (10,000 barrels); US EIA Crude Oil Inventory Change (10,000 barrels) for the week ending December 26

Thursday (January 1): New Year Holiday, markets closed for one day.

Friday (January 2): Eurozone December SPGI Manufacturing PMI Final Reading; UK December SPGI Manufacturing PMI Final Reading; US December SPGI Manufacturing PMI Final Reading

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