Adrian Schmidt

Senior FX Strategist

Dave Sloan

Senior Economist

North America

PakLai Ng

Technical Analyst

Cephas Kin Long Yung

FX Analyst

Mike Macdonald

Senior Technical Strategist

Volkan Sezgin

Senior EMEA Economist

Sanya Suri

Senior Asia Economist

Marlon Chacon

Senior Quantatitive Economist

Mike Gallagher

Director of Research

Macroeconomics and Strategy

UNITED STATES

UNITED KINGDOM

CHINA

INDIA

INDONESIA

SOUTH AFRICA

GERMANY

JAPAN

TURKEY

SWEDEN

SWITZERLAND

Our September Outlook is now published and please see all our markets chapters below.  

September Outlook: Into 2026 -- Market Implications

ITALY

Figure 1: Fed Funds, 2, 10 and 30yr U.S. Treasury Yields Forecasts (%)<img src="https://assets.continuumeconomics.com/storage/uploads/68cc029f2ffb3.png" style="width:100%;">Source: Continuum Economics&nbsp;The softness of employment numbers in recent months is leading money and bond market to discount persistent Fed easing by a further 100bps by July 2026. &nbsp;The 25bps cut at the September FOMC meeting (<a target="_blank" href="https://continuumeconomics.com/a/2fff3ac1/fed-signals-25bps-october-and-december">here</a>), plus SEP and Powell guidance, suggests that most of this will be delivered, but perhaps not as quickly as the market expects. &nbsp;We look for a further 100bps of easing by Q3 2026 and our baseline assumes that the Trump administration does not radically change Fed behavior. &nbsp;The market will be happy to continue discounting more than Fed guidance provided that the employment numbers are soft, as that could mean that the economic slowdown deepens. &nbsp;If a hard landing occurs for the economy then the Fed would likely cut the Fed Funds rate to 2.0-2.5% and we attach a 30% probability to this alternative scenario (Figure 3). &nbsp;2yr yields will see a small further decline but easing towards the neutral rate without a hard landing will likely see 2yr yields move to a premium versus Fed Funds. &nbsp;We would not see this being as large as 1994 or 2002 however (Figure 2) and 2yr yields are forecast at 30bps premium by end 2026 (Figure 1). &nbsp;&nbsp;Figure 2: 2yr-Fed Funds Spread and Fed Funds Rate Inverted (%)<img src="https://assets.continuumeconomics.com/storage/uploads/68cc02b1e4fa7.png" style="width:100%;">Source: DataStream/Continuum Economics&nbsp;10yr yields have declined with the cumulative slowing in the labor market and as CBO estimates of USD4trn of tariff revenues over 10 years have tempered budget deficit and supply concerns for 2025 and 2026. However, some further yield curve steepening can be evident with Fed easing to engineer a soft landing for the economy. &nbsp;In the next 6 months economic jitters can see 10yr yields falling below 4%, but 2yr falling more. Additionally, the Fed Treasuries QT is very small in contrast to other DM government bond markets where QT will likely be 2-6% of GDP in 2026 (Figure 4). &nbsp;The 10-2yr curve is unlikely to be as steep as 1992 or 2003 however (Figure 3) but can widen to 100bps. This can come through cumulatively in 2026, as the market sees that the economy is seeing a slowdown rather than a hard landing and 10yr yields drift back above 4%. &nbsp;10yr yields are forecast at 4.30% by end 2026. &nbsp;&nbsp;Figure 3: 10-2yr U.S. Treasury and Fed Funds Inverted (%)<img src="https://assets.continuumeconomics.com/storage/uploads/68cc02c0590db.png" style="width:100%;">Source: DataStream/Continuum Economics&nbsp;Figure 4: 2026 Budget Deficit and QT to GDP (%)<img src="https://assets.continuumeconomics.com/storage/uploads/68cc02d28c5d3.png" style="width:100%;">Source: IMF/Continuum Economics&nbsp;In terms of alternative scenarios around our baseline, the bias is for lower yields (Figure 5). &nbsp;A harder landing for the U.S. economy could cause more aggressive Fed easing and a large decline in U.S. Treasury yields in 2025. &nbsp;10yr yields could come down to 3.50%, with flight to quality also from an overvalued U.S. equity market. &nbsp;A 2nd alternative scenario is if the Trump administration get a majority of Fed governors, approve only dovish Trump Fed presidents in Feb 2026 and materially reduce the neutral and actual policy rate. &nbsp;The clear impact is a 10-2yr steeper yield curve that could be 125-175bps. &nbsp;For absolute 10yr yields this is less clear, as 2yr yields could fall dramatically and mean small fall, unchanged or small rise in 10yr yields compared to our baseline (Figure 5) due to the economic and easing cycle in 2026. &nbsp; &nbsp;Figure 5: 10yr U.S. Treasury Scenario Analysis &nbsp;&nbsp;&nbsp;<figure class="image"><img src="https://assets.continuumeconomics.com/storage/uploads/68cc041faf561.JPG" style="width:100%;"></figure>Source: Continuum Economics&nbsp;&nbsp;In the EZ, the market is taking the view that the ECB easing cycle has likely ended, which in the pre GFC period normally meant that 2yr German yields went to a premium versus the ECB depo rate as the next tightening cycle was discounted. &nbsp;However, the ECB will likely dampen any talk that 2026 could see a tightening, given that H2 2025 will see a slowdown from the impact of tariff implementation. &nbsp;Additionally, excess reserves in the system likely restrain the scale of premium for 2yr and we see scope in the coming months for +25bps (Figure 6). &nbsp;Even if the ECB cuts in December as we expect, the market will likely view this as the last rate cut. &nbsp;However, we feel that the ECB is underestimating disinflationary pressures (here) from wages and also from redirected China exports, while the growth rebound in 2026 will likely prove less than the ECB expects as financial conditions are tighter than the policy rate level. For us this means one final 25bps cut in the deposit rate to 1.50%, which can bring down the level for 2yr Bunds, but the positive spread versus the ECB policy rate will likely remain in 2026. It is worth remembering that the ECB appeared to end the 2001 easing cycle only to restart 12 months later and then ease an additional cumulative 125bps. &nbsp;Figure 6: ECB Deposit Rate, 2 and 10yr Germany Forecasts (%)<figure class="image"><img src="https://assets.continuumeconomics.com/storage/uploads/68cc02eb153d4.png" style="width:100%;"></figure>Source: Continuum Economics&nbsp;For 10yr Bund yields, the more important influence is the inflation outlook and budget deficit/government debt trajectories. &nbsp;Though Bunds safe haven status has been boosted by the Trump administration attacks on Fed independence, we see the increase supply from the defense and infrastructure expenditure starting to kick in during 2026. &nbsp;This can prompt some further steepening of the yield curve, especially given our non-consensus view on ECB policy rates. &nbsp;10-2yr has been moving in line with ECB easing (Figure 7), but has been steeper in the last 25 years. &nbsp;We feel that 10yr Bund yields will edge up gradually towards 3.0% through 2026 &ndash; especially in H2 (Figure 6). &nbsp;It is worth restating that Trump&rsquo;s tariffs are disinflationary outside the U.S. and we see more disinflation than the ECB, which will likely cap the rise in 10yr yields.&nbsp;Figure 7: 10-2yr Germany to ECB Refi Rate Inverted (%)<img src="https://assets.continuumeconomics.com/storage/uploads/68cc02fb06a0d.png" style="width:100%;">Source: Continuum Economics&nbsp;For EZ sovereign spreads, the issue is more France than Italy, as expectations remain of a stable Italian government and fiscal consolidation until at least the December 2027 election. France is now stuck in political paralysis, which could see the 10yr OAT-Bund spread go to 100bps. &nbsp;We feel the French authorities will not ask for ECB TPI, given that the inability to agree fiscal consolidation and the likelihood the ECB would not agree to do so. &nbsp;However, against this environment, we also see the ECB slowing the pace of QT by around 25% at some stage in the next 12 months to ensure that policy rates are transmitted to the EZ economy and not for French reasons alone. &nbsp;Figure 8: 10-2yr JGB and BOJ Policy Rate Inverted (%) <img src="https://assets.continuumeconomics.com/storage/uploads/68cc030c12089.png" style="width:100%;">Source: Continuum Economics&nbsp;In Japan, expectations of BOJ policy normalization remain key. &nbsp;The BOJ want to normalize, but the pace will be slow with base wage inflation and unit labor costs suggesting that current inflation will come down in 2026 and 2027. &nbsp;We see scope for the policy rate to rise to 1.00% in two steps over the next 9 months, before a growth slowdown is enough to produce a pause in the tightening cycle &ndash; we also expect CPI to come below 2%. For 2yr JGB&rsquo;s, this cautious tightening will likely see a ratch up in 2yr JGB yields to 1.15% by end 2026. &nbsp;&nbsp;10yr yields will be impacted by this BOJ action, but the widespread expectation is that the BOJ will lift the policy rate to 1% or slightly above over the next 2-3 years will reinforce a positive shaped yield curve. &nbsp;The slowing of gross bond purchases to a JPY2trn pm pace by Q1 2027, would equate to much more aggressive QT than ECB/BOE (Figure 4). &nbsp;However, we feel that GDP and inflation will not be high enough for the BOJ to be confident of such an acceleration in QT and this likely means that the BOJ could keep a JPY2.5trn pm pace from June 2026. Even so, the BOJ JGB holdings are falling faster than the 1999-2007 period when holdings were small up/small down or flat. During this period the 10-2yr yield curve averaged 100-125bps (Figure 8). &nbsp;Though Japan&rsquo;s budget deficit is not excessive, it is still large enough to argue for higher 10yr yields in an era of QT and also changing demand among Japanese end investors for long-dated bonds. High 20 and 30yr yields in Japan also provide competition with 10yr yields. We see 10yr yields at 2.00% mid-2026 and 1.85% end 2026. &nbsp;The scale of BOJ QT is also so large that a long-end crisis occurs to cause the BOJ to actually increase gross monthly bond purchases and reduce net QT to a less aggressive percentage of GDP.&nbsp;Figure 9: 10, 2yr Gilts and BOE Bank Rate Forecasts (%)&nbsp;<figure class="image"><img src="https://assets.continuumeconomics.com/storage/uploads/68cc04e009956.png" style="width:100%;"></figure>Source: Continuum Economics&nbsp;In the UK, the BOE MPC is split on rate easing, but appears to want to see the November 26 budget to understand whether fiscal tightening will be backloaded or also impact growth in the next 1-2 years. &nbsp;With the floating votes on the MPC also wanting to see progress on monthly inflation, a pause is being discounted by the money and bond markets. &nbsp;However, with policy rate still restrictive; financial conditions also tight; inflation set to fall over the next 2 years and the UK employment deterioration and GDP growth remaining bumpy, the MPC consensus for further BOE rate cuts will return. &nbsp;We look for the BOE rate to come down to 3.25% (Figure 9), which will see 2yr yields moving lower. &nbsp;However, as the policy rate move towards perceived neutral levels and the easing cycle slows, the 2yr gilt yield will likely move to a positive spread versus the BOE policy rate. The 2yr-BOE bank rate pushed to 100bps at the end of the 1999 and 2002-2004 easing cycle, as the market looked to the next tightening cycles. &nbsp;However, a 2027 BOE tightening cycle is unlikely and we see the premium to 2yr yields will like be modest rather than large (Figure 9). &nbsp;&nbsp;Figure 10: 10-2yr and BOE Bank Rate Inverted (%)<img src="https://assets.continuumeconomics.com/storage/uploads/68cc031cde974.png" style="width:100%;">Source: Continuum Economics&nbsp;10yr Gilt yields can be held up by huge supply pressures, as the BOE&rsquo;s reduction in QT to &pound;70bln in the next 12 months still leaves the market needing to absorb net bonds of 6.0-6.5% of GDP (Figure 4) once the CGNCR ex Network Rail net issuance is added. End 2025 we forecast 4.60% (Figure 9). We would argue that BOE QT should have stopped gilt sales and proceed at a moderate pace multi-year, but we will likely see a further slowing in September 2026 to a &pound;35-50bln pace for the following 12 months. &nbsp;Cumulative BOE easing can feed through in 2026 to produce a decline in 2yr and further yield curve steepening, though we would take the view that this slows around 100bps rather than returning to the steeper 10-2yr yield curve seen in the 1990&rsquo;s (Figure 10). &nbsp;A 100bps yield curve would be steep enough to encourage some lengthening of duration provided the government sticks to its fiscal rules in the 2025 and 2026 fiscal announcements. This would translate into a small decline in 10yr yields in 2026.

•    We continue to forecast further yield curve steepening across the U.S./EZ and UK, driven by cumulative easing.  For the U.S. this can see a mod

DM Rates Outlook: Steepening Yield Curve The Old Normal?

EMEA

Macro Strategy

DM Country Research

European Central Bank

Federal Reserve

Bank of England

Bank of Japan

DM Central Banks

Outlook

Eurozone

Editor's Choice

BRAZIL

&nbsp;Figure 1: 12mth Fwd S&amp;P500 P/E Ratio and 10yr Real U.S. Treasury Yield Inverted (Ratio and %) <img src="https://assets.continuumeconomics.com/storage/uploads/68cbfd423c7ce.png" style="width:100%;">Source: Continuum Economics with forecasts to end 2026&nbsp;The U.S. equity market bullishness reflects good corporate earnings reality, buybacks and the AI story. &nbsp;Modest bad news is not denting that story as investors are fearful of not being exposed to the market (the market has a non-linearity as major bad economic news would hit the market). &nbsp;Nevertheless, equity valuations have now returned to early year expensive levels. The equity risk premium is low and equity-bond comparisons are stretched (Figure 1). &nbsp;If the U.S. economy stabilises and the Fed cuts gradually, then intermittent consolidation followed by a further up move could be seen and the market could become more stretched. &nbsp;However, we feel that the U.S. economy can deteriorate still further in the coming months, as the lagged effects of tariffs boost inflation and restrain spending. &nbsp;This will start to cause bumpiness in corporate earnings growth and a widening of tight corporate bond spreads. &nbsp;All of this can prompt a 5-10% correction in the equity market and our baseline is for 6100 for end 2025 on the S&amp;P500. &nbsp;However, we are not forecasting a hard landing for the economy, which means that this is likely to be a correction rather than a more serious selloff.&nbsp;Meanwhile, the AI story is helping semiconductor chip and cloud based revenue. &nbsp;However, AI application revenue is small, while some also fear destruction to mega tech ad based revenue as search engines reset towards AI based recommendations. &nbsp;This is an issue to watch for U.S. equities in each quarterly results and guidance, rather than an active risk at this juncture. &nbsp;For 2026, economic data should side more with economic weakness rather than hard landing and this can produce some economic stabilisation and then a rebound in the equity market. &nbsp;A hard landing could trigger a bear market down to 5000 on the S&amp;P500, but our assessment is that this is a 30% probability event. Equities can also be helped by consistent Fed easing. &nbsp;Though we do not see the Trump administration materially influencing the pace of easing, if Trump did control rates it could have positives (lower short rates/faster economy) and negatives (higher long-term rates, USD decline and fewer foreign investors) for U.S. equities. Meanwhile, though non U.S. investors have reduced U.S. exposure, this appears to be portfolio adjustment rather than a major shift away from the U.S.. Finally, domestic bulls will be emboldened by yet another mid cycle slowdown not turning into recession. Valuations will be a restraining influence, but we still see scope for 6600 on the S&amp;P500 by end 2026. &nbsp; &nbsp;&nbsp;Figure 2: Germany/UK 12mth Earnings Yield minus 10yr Real Government Bond Yield (using 10yr breakeven inflation)<img src="https://assets.continuumeconomics.com/storage/uploads/68cbfd726e2c2.png" style="width:100%;">Source: Continuum Economics. Continuum Economics projections until end-2026 using 10yr breakeven inflation and Bund/Gilt yield forecasts.&nbsp;EZ equities have underperformed the U.S. in the last few months, after the early year outperformance. Concern over the economic recovery, plus corporate earnings downgrades, are restraining the market. &nbsp;Though the ECB has cut rates by 200bps, any boost to the economy into 2026 is projected to be small. &nbsp;Fiscal policy is also a mixed influence, with a boost from German defense and infrastructure spending but France restrained by an adverse budget deficits and political splits &ndash; Italy and Spain are also fiscally restrained by multi-year fiscal consolidation. Equity-bond valuations for EZ equities are better than the U.S., but Germany is now tight relative to post GFC history (Figure 2) and the 12mth fwd P/E ratio is towards the top of a reasonable band. Finally, a boost from Ukraine now seems unlikely, as continued war into 2026 appears more likely than a peace deal. Portfolio diversification can mean that EZ equities match U.S. equities in the next 15 months, but outperformance is unlikely unless a proper growth pick-up is evident (e.g. rundown of excess household savings and/or business investment wave). &nbsp;Though we look for two further 25bps cuts from the ECB, this is not enough in itself.&nbsp;Figure 3: UK 12mth Earnings Yield minus 10yr Real Government Bond Yield Inverted (%)<img src="https://assets.continuumeconomics.com/storage/uploads/68cbfd9eaf84a.png" style="width:100%;">Source: Datastream/Continuum Economics. UK real yield uses RPI instead of CPI.&nbsp;Japan equities have lagged other major DM equity markets in 2025, given the JPY has rebounded and tempered corporate earnings. &nbsp;However, share buybacks remain large, which support market technicals. &nbsp;The BOJ is also not a constraint on the market, with policy rate hikes at a slow pace/negative real policy rate and equity earnings yields well above bond yields. &nbsp;Even so, we see scope for 125 on USD/JPY by end 2026, as the overvalued USD eases further. &nbsp;This can restrain corporate earnings in 2026. &nbsp;Overall, we can see Japanese equities pushing higher in 2026, but performing in line with U.S. equities.&nbsp;Re UK equities, the FTSE 100 has outperformed FTSE250 on global versus UK factors, as the UK is seen to be fiscally restrained and prone to stagflation risks that both reflects and slows the BOE easing cycle. &nbsp;2025 corporate earnings growth has also deteriorated through the year, while the labor market is slackening more quickly than other DM economies and risks an economic slowdown. This could mean that despite still attractive valuations, domestic equities continue to lag global equities. However, we see more slowing in service and wage inflation, which should allow more BOE easing than discounted in money markets in the next 15 months. The stagflation fears should ebb and this can see UK equities moving in line with U.S. equities. Overall, other DM equity markets will likely follow U.S. equities, as less stretched valuations are offset by domestic economic and fiscal issues. &nbsp;Emerging MarketsChina equities have outperformed in Q3 helped by China tech; liquidity and a sense that the economy has stabilized. &nbsp;However, valuations are no longer cheap in equity terms or against real government bond yields (Figure 4), though some are looking at earnings yield-nominal government bond yield to support the market. China&rsquo;s 2025 corporate earnings growth estimates have also been revised down but this also need to happen to 2026 earnings to be more consistent with 5% nominal GDP growth as aggressive disinflation curbs profit margins with the excess of production over domestic demand. &nbsp;This means that the outperformance is not built on solid foundations and a correction could occur.&nbsp;The China AI story certainly has upside though, as Deepseek breakthrough leaves China pursuing a competitive AI route compared to U.S. tech approach of closed AI and high cost. &nbsp;However, this is a sector story rather than a whole market story, where the macro and policy outlook are more important. &nbsp;A U.S./China trade deal would be a positive catalyst. &nbsp;We still attach a 65% probability (<a target="_blank" href="https://continuumeconomics.com/a/d3bf033d/uschina-trade-deal-slow-progress">here</a>) to this happening, which could see effective tariffs reduced to 15-20% and see 2.5-5% outperformance versus the U.S. in 2026. However, this is a tactical play and the alternative scenario is underperformance on no trade deal being reached. Multi-year we still do not see the overall China equity market strategically outperforming, given the overhang of the property bust and structural headwinds from population aging/slowing productivity. &nbsp;We do like China tech multi-year however.&nbsp;Figure 4: China Earning-Bond Yield Relative Cheap Compared to Other Big EM&rsquo;s (%) &nbsp;<img src="https://assets.continuumeconomics.com/storage/uploads/68cbfdb42fb25.JPG" style="width:100%;">Source: Continuum Economics. CAPE Earnings Yield-10yr Real government bond yield&nbsp;Indian equities have lagged with the tariff war with the U.S. and also EM equity funds being redirected back towards China. However, U.S. tariffs will only have a modest effect and will likely be counterbalanced for the economy and corporate earnings prospects by RBI and government stimulus measures (here). &nbsp;Indian long-term corporate earnings prospects also mean that global investors will likely tilt towards India in EM portfolios given the USD multi-year downtrend against other currencies. Even so, the 12mth fwd price earnings ratio is back at levels that mean a U.S. selloff would likely be mirrored in India tactically in the coming months, while the Equity to Bond yield spread is now modestly unfavorable (Figure 5). &nbsp;The next 6-9 months could see India broadly mirroring U.S. equity market performance. &nbsp;H2 2026 should be better as the long-term bull factors help and we see scope to outperform U.S. equities by 5% by end 2026. &nbsp;&nbsp;Figure 5: India 12mth Fwd Earnings Yield-10yr Nominal government Bond Yield (%) <img src="https://assets.continuumeconomics.com/storage/uploads/68cbfce0747bc.png" style="width:100%;">Source: Datastream/Continuum Economics.&nbsp;Brazil&rsquo;s equities have had a good 2025 so far, as the policy rate has likely peaked. However, earnings growth has been trimmed as ultra-tight monetary policy feeds into economic slowdown and earnings rebound looks like a 2027 rather than 2026 story. This means fwd earnings yields below fair value are the main bullish argument, but this now requires bond yields and then policy rates to come down to drive outperformance. &nbsp;This will take time as the BCB is on hold until spring 2026 and the bond market remains wary about fiscal policy ahead of an expected close presidential election in Oct 2026. &nbsp;Intermittent phase of outperformance will likely be followed by underperformance on political news. Late 2026 should then be better with consistent BCB easing helping to bring down yields and allowing a fall in fwd earnings yields that sees the price/earnings ratio moving up towards 9-10. &nbsp;5% outperformance versus the U.S. can be seen in 2026.&nbsp;

•    The U.S. equity market's bullishness reflects good corporate earnings reality, buybacks and the AI story.  However, we feel that the U.S. econo

Equities Outlook: Correction Then Up In 2026

Asia/Pacific

Latin America

Continuum Daily

Figure 1: EUR/USD and the 2 year US/Germany yield spread<figure class="image"><img src="https://assets.continuumeconomics.com/storage/uploads/68d2af65017eb.png" style="width:100%;"></figure>Source: Datastream, CEEUR/USD broke away from yields spread correlation when Trump announced reciprocal tariffsAs figure 1 shows, EUR/USD had been well behaved in recent years, sticking closely to the 2 year yield spread, until Trump announced reciprocal tariffs at the beginning of April. After that, the USD fell back against the EUR and related currencies, but not against the Asian currencies, with the JPY and AUD underperforming relative to yield spreads. &nbsp;Reports suggest this reflected a shift by institutional investors away from the US towards Europe, although it may also reflect increase FX hedging. It remains unclear why this excluded most Asian currencies. Subsequently, we have seen a weakening in U.S. employment growth that has led to a decline in U.S. yields and a further rise in EUR/USD, although once again, the JPY has not participated. Some of the risk premium in the USD that emerged after the tariff announcement has been eroded as trade deals have been made and the largest tariffs have been reduced, and the EUR/USD outperformance relative to yield spreads has declined through Q3. There has been some restoration of the relationship between yield spreads and EUR/USD. We would expect this to continue through Q4, but the EUR may not benefit much from the correction in risk assets that we anticipate.Figure 2: Correlation of One Week Changes in FX With One Week Changes in S&amp;P&mdash; 3 month rolling<figure class="image"><img src="https://assets.continuumeconomics.com/storage/uploads/68d2b013eb906.png" style="width:100%;"></figure>Source: Datastream, CEEUR/USD upside may be restricted if equities weakenWhile this is likely to move yield spreads in the EUR&rsquo;S favour, EUR/USD has also generally enjoyed a positive correlation with equities, so any significant equity downturn might see some initial decline in the EUR and other &ldquo;riskier&rdquo; currencies. Of course, when equities fell back from February to April, the correlation with equities reversed and the USD fell back, but this might be seen as a one off &ldquo;structural&rdquo; change as investors reduced U.S. weightings, and may not be repeated in another correction. Even so, we still see some modest EUR/USD strength in the event of an equity market correction. The Eurozone economy will not be impervious to weaker asset markets and/or a slowdown in the U.S., but it is less sensitive to market moves and is likely to see no more than a mild impact. This could still be significant given the low starting point for Eurozone growth, and we still see more downside for Eurozone yields than the market, so we are not looking for substantial EUR strength.&nbsp;Figure 3: USD/JPY and 10 &nbsp;year US/Japan yield spread<figure class="image"><img src="https://assets.continuumeconomics.com/storage/uploads/68d2b0ae74926.png" style="width:100%;"></figure>Source: Datastream, CEMore potential for JPY gainsUSD/JPY has dramatically underperformed its historic relationship with yield spreads in the last few months (Figure 3), remaining nearly unchanged in the face of a sharp contraction in spreads. Unlike the EUR, the JPY didn&rsquo;t benefit from Trump&rsquo;s announcement of reciprocal tariffs, and while the EUR has outperformed its normal relationship with yield spreads in the last two quarters, the JPY has underperformed. While there might have been some initial concern that Japan would suffer more from tariffs than others, the trade deals between the U.S. and the EU and the U.S. and Japan don&rsquo;t put Japan at any significant disadvantage. So the reason for JPY weakness appears to be the strength of risk appetite and the continuing decline in risk premia. The JPY has shown a strong positive correlation with U.S. equity risk premia over recent years, particularly on the crosses. While there is little fundamental justification for this, it is a relationship that persists and currently appears to be driving JPY crosses more reliably than any yield spread relationship (see Figure 4).Figure 4: GBP/JPY and U.S. nominal equity risk premium<figure class="image"><img src="https://assets.continuumeconomics.com/storage/uploads/68d2b107dce8c.png" style="width:100%;"></figure>Source: Datastream, CEOur central view involves a 7% correction lower in U.S. equities by the end of the year, and some consequent decline in U.S. yields as the market anticipates more Fed easing in response. This would imply a substantial rise in equity risk premia, consistent with a EUR/JPY decline to the 160-165 area and a GBP/JPY decline to the 185-190 region, based on the relationship show in Figure 4. This would be consistent with a USD/JPY drop to 135, which would move it closer to if not quite back in line with the historic yield spread relationship. Bigger picture, we would still argue for further JPY gains longer term, as valuations remain extreme (see Figure 5), with a move to 125&nbsp;seen by the end of 2026, even though we expect an equity market recovery back to current levels by then.Figure 5: % differences from PPP<figure class="image"><img src="https://assets.continuumeconomics.com/storage/uploads/68d2b170b851e.png" style="width:100%;"></figure>&nbsp;&nbsp;Source: Datastream, CEGBP risks on the downsideThe main event for GBP in Q4 will be the November 26th Budget, which will have significance for at least the next year. &nbsp;GBP has periodically suffered through this year, and in previous years, from concerns about the rising government debt burden and the need to reduce the fiscal deficit. Due to the government&rsquo;s failure to pass their proposed welfare &nbsp;spending cuts through parliament, the Budget is expected to see a significant fiscal tightening of &pound;20bn or more. This is not currently included in the BoE&rsquo;s projections for the economy, and so can potentially have a significant impact on monetary policy. The exact size and timing of any tightening will be important for the near term monetary policy outlook and GBP. Typically, it makes sense for the government to institute any tax increases early in the political cycle, to minimize the electoral impact, and if this is the case the fiscal tightening is likely to mean increased monetary easing from the BoE through 2026. In any case, we expect the BoE to ease significantly more than the 45bps priced in by the end of 2026, as there is already evidence of significant weakness in the UK labour market which can be expected to feed through to wages and inflation in the coming year.EUR/GBP has continued to move broadly in line with real yield spreads in recent years, and we would expect real UK front end yields to converge with EZ yields in the coming year or two. While convergence may be slow, it should lead to EUR/GBP edging up towards 0.90. There are also risks that we have more periods of GBP weakness if the government fail to address fiscal concerns, so whether there is fiscal tightening or not, GBP risks look to be on the downside.Figure 6: Real EUR/GBP and real yields<figure class="image"><img src="https://assets.continuumeconomics.com/storage/uploads/68d2b1cf0ae68.png" style="width:100%;"></figure>Source: Datastream, CECHF strength remains extremeThe CHF remains something of an anomaly in that it is traditionally a safe haven, but has been the world&rsquo;s second strongest currency this year (after the SEK) in a generally risk positive market, despite the SNB cutting the policy rate to zero. It also remains by far the most expensive major currency on a PPP basis (see figure 5). Given the failure of the CHF to decline in risk positive conditions this year, it&rsquo;s hard to imagine a scenario where it can see a significant move lower. In truth, it is less strong in real terms this year than it has been in nominal terms, due to the low level of Swiss inflation. But in the absence of a major shock, EUR/CHF looks to be forming a base near 0.93, and we would expect the SNB to oppose a move below there, at least verbally, and possibly by intervention or even by instituting negative rates, although this would be a last resort. We therefore see a mild rise in EUR/CHF to put it back in the middle of its post 2015 range in real terms.Figure 7: EUR/CHF real and nominal&nbsp;<img src="https://assets.continuumeconomics.com/storage/uploads/68d2b24f4962d.png" style="width:100%;">Source: Datastream, CEHowever, in the short term, the most likely trigger for any significant JPY movement looks likely to come from shifts in risk sentiment. A sharp weakening in risk appetite would, first of all, tend to benefit the JPY via lower US yields. But there has also been a consistent relationship between JPY crosses and equity risk premia in recent years, which suggests that any rise in risk premia will tend to benefit the JPY, particularly on the crosses against the riskier currencies. We believe US equities are already toppy here because US risk premia are very low given the current state of the economy. There is limited scope for above trend growth given near full employment, and the downside risks due to tariffs and geopolitical concerns, as well as the pressure to hold down the budget deficit, are more substantial than they have been for some time. This makes it difficult to justify equity risk premia at near 20 year lows. Historically, there is a tendency for the market to suffer a dose of reality sometime in the autumn, but the July 9 deadline for the decision on Eurozone tariffs could also possibly be a trigger. Either way, Figure 7 suggests that there is substantial upside risk for the JPY on the crosses if there is any rise in risk premia from here.AUD and NOK still have potential to make gainsWhile it is a little surprising that the CHF has outperformed in a risk positive market, it is similarly unusual for the AUD and NOK to underperform in these circumstances, but both have lagged substantially behind the levels suggested by yields spreads over the last year. In the AUD&rsquo;s case, some of its underperformance has related to concerns about China, but as these have faded AUD/USD has started to edge higher. Even so, it looks to have potential to extend gains as long as Asian equity sentiment remains positive.Figure 8: AUD/USD and yield spreads<figure class="image"><img src="https://assets.continuumeconomics.com/storage/uploads/68d2b2b45a22b.png" style="width:100%;"></figure>Source: Datastream, CEThe NOK&rsquo;s weakness has no obvious cause, but may relate in part to its historic high valuation and in part to the large foreign currency investments from the government pension funds. &nbsp;But neither of these are new and don&rsquo;t really explain its weakness in the last year or two. While we still see scope for a NOK recovery over time, it has become hard to find a trigger for it given the persistent weakness in the last year, but attractive yields relative to most of Europe should still make it a strong long term performer. But risk sensitivity and low liquidity make the NOK vulnerable in the event of any shocks.Figure 9: CHF/NOK real and nominal<figure class="image"><img src="https://assets.continuumeconomics.com/storage/uploads/68d2b3278444a.png" style="width:100%;"></figure>Source: Datastream, CE&nbsp;&nbsp;

·       Bottom Line: The USD has continued to edge lower against the EUR in the last quarter as market expectations of Fed easing have increased foll

DM FX Outlook: USD steadies but vulnerable to equity correct

DM FX Outlook: USD steadies but vulnerable to equity correction

Foreign Exchange

FX Forecast

Figure 1: 15mth Total Returns Versus the USD (%)<figure class="image"><img src="https://assets.continuumeconomics.com/storage/uploads/68d3c45be3995.JPG" style="width:100%;"></figure>Source: Continuum EconomicsAsiaFigure 2: USDCNY and 2yr China-U.S. Government Bond Spread (%)<figure class="image"><img src="https://assets.continuumeconomics.com/storage/uploads/68d3c46d23a02.png" style="width:100%;"></figure>Source: Datastream/Continuum EconomicsThe USD downtrend against DM currencies has spilled over to allow a recovery in the CNY this year.&nbsp; We now forecast 7.10 for end 2025.&nbsp; What happens into 2026 when we forecast a further moderate decline in the USD generally?&nbsp; Some upward pressure for the CNY will come from this.&nbsp; However, interest rate differentials will still remain adverse unless the U.S. has a hard landing and cuts interest rate substantially.&nbsp; In our baseline of a U.S. soft landing, the interest rate differential will restrain CNY gains.&nbsp; We also suspect that China authorities will restrain USDCNY around 7.00 with or without a trade deal with the U.S. &ndash; we still attach a 65% probability of a trade deal being reached.&nbsp; Exports to the U.S. have seen a permanent step lower and China will want to maintain some competitiveness. H1 2026 will likely see USDCNY touch 7.00 after a trade deal is announced, but official exchange rate management will likely stabilise USDCNY at 7.10 by end 2026.&nbsp;&nbsp;&nbsp;&nbsp;The INR remained under pressure through much of 2025, weighed down by weak FDI inflows, intermittent portfolio outflows, and policy uncertainty&mdash;particularly around U.S. trade ties and the India&ndash;Pakistan conflict in May. Easing domestic rates add to depreciation pressures, though RBI intervention will offer periodic support going forward. A US trade deal, if finalised in Q4, could also stabilise sentiment. We expect USDINR to rise to 87.8by end-2025, from 85.6 at end-2024. Over the medium term, strong growth and falling inflation will lend some support, but structural pressures&mdash;such as a persistent current account deficit and softening capital inflows&mdash;will keep USDINR on a gradual rising path through 2026 to 88.3. Meanwhile, the Indonesian Rupiah (IDR) regained ground against the US dollar in Q2, largely due to dollar weakness. We expect a small recovery in the near term, supported by Fed rate cuts, less political tension in Indonesia and Bank Indonesia&rsquo;s healthy FX reserves, which enable intervention. However, long-term political uncertainty and concerns over central bank independence will weigh on investor confidence, restraining IDR appreciation versus the USD through 2026.In contrast, Malaysia&rsquo;s current-account surplus and Bank Negara&rsquo;s active intervention&mdash;backed by ample reserves&mdash;will help limit currency swings. These buffers, built up from strong trade performance, support exchange rate stability. Looking ahead, we expect the Malaysian Ringgit (MYR) to remain broadly stable over 2026, driven by easing trade uncertainty, US dollar weakness and a narrowing U.S.&ndash;Malaysia rate differential. We expect 4.20 on USDMYR by end-2026.&nbsp;LatAm: Rebound Limits?BRL and MXN have seen strong recoveries against the USD in 2025, but how much further can this go into 2026?&nbsp; We still forecast 5.40 for USD/BRL by end 2025.BRL has headwinds from the October 2026 presidential elections, which will likely see a runoff between Lula and Freitas (an ex Bolsonaro minister <a target="_blank" href="https://en.wikipedia.org/wiki/Tarc%C3%ADsio_de_Freitas">here</a>).&nbsp; With tight opinion polls the risk is for pre-election fiscal slippage and this could hurt domestic sentiment.&nbsp; However, global investors are not concerned provided worst case fiscal situations do not play out and they are more focused on the still large carry and bond yield differentials versus the U.S.&nbsp; When the USD saw a multi-year downtrend in 2002-08, the BRL appreciated significantly against the USD. The U.S. tariffs on Brazil do not change this picture due to exemptions and the modest percentage of exports going to the U.S. &nbsp;However, we would not look for this scale of appreciation to be repeated, but we can see USDBRL to 5.20 in H1 2026 on yield plays.&nbsp; The BRL real effective exchange rate is still around 9% below the 10yr average. H2 will likely see a pause around the election and will have different outcomes depending on who is the victor, but our baseline for now is 5.20 &ndash; a Freitas victory could see a test of 5.00, as BCB easing in H2 2026 will likely only be modest.&nbsp; &nbsp;Figure 3: Brazil Exchange Rate, 10-year Yield Spread, and Policy Rate Spread with U.S&nbsp;<img src="https://assets.continuumeconomics.com/storage/uploads/68d3c47d03a6a.png" style="width:100%;">Source: Datastream and Continuum EconomicsFor the MXN, President Donald Trump wants to renegotiate USMCA in 2026, which will deepen the trade drama going into 2026 and likely mean a correction in the MXN by end 2025.&nbsp; A renegotiation will be problematic, but we feel that Mexico sees the big picture and will concede to keep most exports going to the U.S.&nbsp; This could mean a choppy and weaker MXN in H1 2026, before a deal is agreed.&nbsp; H2 could see some renewed upward pressure for the MXN with a USD downtrend and Banxico slowing the pace of easing and the Fed restarting. The policy rate differential with the U.S. will likely move back towards 4%.&nbsp; However, the real effective exchange rate for MXN is 14% above the 10yr average in contrast to the BRL picture.&nbsp; Additionally, the MXN saw little benefit from the major USD downtrend 2002-08.&nbsp; Thus we see a recovery in the MXN in H2 2026, but only to 18.8 on USDMXN.EMEAEMEA currencies will continue to be divergent depending on inflation and interest rate differentials, and 2026 will likely see more divergence across EMEA given global uncertainties facing the world economy in terms of both the impact of tariffs and geopolitics.First, we expect the downward pressure will remain for TRY and RUB as inflation differentials remain large, despite inflation easing slowly in both countries following previous aggressive monetary tightening. We envisage RUB would remain volatile in 2026 since inflationary pressures won&rsquo;t likely soften as quickly as CBR expected coupled with foreign capital inflows remaining weak until sanctions are lifted. Macroeconomic instability is substantial unless the Ukraine war comes to a surprising end, which is nor our main scenario. RUB will still be falling on a spot basis in 2026 due to inflation differentials and our end year USD/RUB rate predictions are at 83.5 and 90 for 2025 and 2026, respectively.When it comes to TRY, we continue to see losses for TRY in 2026 as inflation remains much higher than Turkiye&rsquo;s main trading partners, the current account deficit is large and foreign capital inflows are weaker-than-expected. The arrest of opposition mayors in 2025 have risked the disinflationary process, triggered market losses coupled with loss in investor confidence. In 2026, TRY will still be falling on a spot basis but at a slower pace than the interest rate differentials against the USD, since we expect CBRT will continue its cutting cycle in 2026, but at a cautious pace due to stickiness in inflation and domestic and geopolitical risks. (Note: Our end year key rate prediction for 2025 and 2026 are at 37% and 24%, respectively). Our prediction for the USD/TRY rate stands at 42 by the end of 2025, and 48 for end 2026. It is worth noting that sticky inflation could stay above expectations due to surging food and services prices and adverse geopolitical developments, which would mean more TRY depreciation than our central scenario, likely pushing the rate over 50 for end 2026.&nbsp;&nbsp;Turning to South Africa, we think the South African Reserve Bank (SARB) will continue its cutting cycle in 2026 carefully (unless steep hikes in domestic inflation occur) as inflation differentials remain modest against the U.S. As we foresee a Dollar downtrend, Fed to reduce the rate by 25bps in October/November and 50 bps in 2026, and SARB to cut key rate by 50 bps in 2026, the interest rate differentials will remain in favour of ZAR. (Note: Despite DM easing cycles continuing, we think SARB will have to be cautious due to global uncertainties like geopolitical risks, tariff wars, and new 3% inflation anchor in 2026, which could slow SARB policy easing). On the upside, if Trump relents on tariffs, power cuts are managed, inflation is contained and there is an improvement in the geopolitical situation, we are likely to see a more risk positive picture emerging with ZAR in 2026. We expect the South African economy will continue to be supported by a trade surplus coupled with a higher FDI and equity flows thanks to increasing investor appetite. Under current circumstances, our end year USD/ZAR rate prediction has decreased to 17.45 for 2025, and 17.40 for 2026, when compared with the June outlook.&nbsp;Figure 4: USD/ZAR Rate and 10yr South Africa-U.S. Government Bond Yield (%)<figure class="image"><img src="https://assets.continuumeconomics.com/storage/uploads/68d3c44fa34f5.JPG" style="width:100%;"></figure>Source: DataStream/Continuum Economics

EM FX Outlook: USD Less in Favor, but EM Mixed

EM Central Banks

EM Country Research

Quantitative Economist

SAUDI ARABIA

Oil: OPEC+ playing offensiveA new cycle in oil market supply has now consolidated. This cycle began in October 2024, following the reversal of the 2.2 mln b/d voluntary production cuts announced in November 2023. The unwinding of these cuts was completed in September 2025, after which OPEC+ took the unexpected step of gradually reversing a second round of voluntary cuts, amounting to 1.65 mln b/d, that had been introduced in April 2023 and will begin to be phased out in October. We view this shift as a structural adjustment.A number of factors have contributed to OPEC&rsquo;s policy shift. First, the group seeks to reclaim market share; for instance, OPEC&rsquo;s share of crude oil production is expected to decrease from 39% in 2017 to 35% in 2026, according to the Energy Information Administration (Figure 1). Second, although prices are down 12% year-to-date (as of mid-September), the increase in output has not pushed oil below USD 50 &ndash; a level we view as a potential breaking point. Third, the announced reversal of production cuts does not translate into an immediate equivalent increase in supply, owing to i) compensation requirements and ii) capacity constraints in certain member countries. Indeed, spare capacity is concentrated in a small set of Gulf producers; whether countries beyond Saudi Arabia and the UAE provide the marginal barrels will determine the total effective supply growth. Moreover, compensation schedules and operational constraints mean that headline quota increases overstate near-term flows: OPEC has published member compensation plans that create offsets stretching into 2026.Figure 1: Share of crude oil production<figure class="image"><img src="https://assets.continuumeconomics.com/storage/uploads/68d1152a0c1f2.png" style="width:100%;"></figure>Source: EIA / Continuum EconomicsIn our baseline scenario, we expect the unwinding of the second layer of production cuts (1.65 mln b/d) to proceed at a pace of 137,000 b/d per month for the remainder of the year. Looking ahead, our central scenario for 2026 also assumes a continuation of production increases at the same rate, implying that this second tranche of cuts would be fully reversed by September 2026. An alternative scenario could materialize, involving a pause or even a reversal of the production hikes, should prices fall below USD 50 &ndash; though this is not our baseline. Regarding the remaining group-wide cuts of 2 mln b/d, which are scheduled to stay in place until the end of 2026, we expect them to hold as planned. A faster-than-anticipated unwinding of these barrels would be surprising, and we instead assume that they will likely be rolled back in 2027.In terms of non-OPEC supply, growth is expected to continue in 2026, led primarily by producers in the Americas &ndash; most notably the U.S., Canada, Guyana, and Brazil. However, supply growth in these countries is set to fall behind that of previous years (0.8% in 2026 vs. 2.4% in 2025, according to EIA estimates). For instance, in the U.S., lower prices and reduced upstream investment could weaken output growth. In Brazil, gains will be tempered by project delays, infrastructure bottlenecks, and potential maintenance or regulatory constraints. In Guyana, output is set to continue growing although at a slower pace and could pick up in 2027 when the new developments in the Stabroek block &ndash; specifically the Yellowtail, Uaru, and Whiptail projects &ndash; reach full capacity.For the remainder of 2025, the oil market is expected to experience moderate support, underpinned by a combination of macroeconomic and demand-side factors. Anticipation of consistent easing by the Fed could provide a modest boost to global oil demand by easing financial conditions, supporting economic activity, and improving sentiment. In addition, China&rsquo;s recent stockpiling has boosted crude demand, reflecting an effort to capitalize on low prices. On the downside, the seasonal tailwinds that supported consumption over the summer are now fading.Looking into 2026, the outlook for oil is one of modest growth. Fed&rsquo;s rate cuts over the year could stimulate global economic activity and oil consumption modestly, as we expect growth below trend in the U.S., which coupled with weak OECD growth in Europe and Japan, mean that demand could fall short in a growing supply environment. In the U.S., it is also worth highlighting that policy reversals that weaken electric vehicle (EV) adoption may weigh on long-term energy transition trends. Consumer demand in China is threatened by uncertainty regarding employment and income growth; nevertheless, if the country continues taking advantage of low prices to build its inventories, this would provide solid support to crude &ndash; as it has over the past months. Emerging markets, particularly India, Southeast Asia, Africa, and the Middle East, are likely to remain key drivers of oil demand growth, reflecting ongoing industrialization and mobility trends. India passed China as the largest contributor to global oil demand growth in 2024, according to the International Energy Agency, responding to a rise in vehicle ownership as well as investments in refining and petrochemical infrastructure. However, these elements may be tempered by weaker fundamentals in developed economies. Overall, while 2026 offers potential for stronger demand from emerging markets, oil prices are likely to remain sensitive to both cyclical and policy-driven headwinds in the developed world.We are marginally reducing our year-end 2025 forecast for WTI from USD 63 to USD 60, and for end-2026 we now expect prices to reach USD 53 instead of USD 58. Risks to our outlook include a deviation in OPEC+ policy from our baseline assumption &ndash; such as stopping or reversing the gradual return of barrels to the market. Additional geopolitical sanctions by the U.S. or Europe targeting Russian oil could also disrupt supply, though this is unlikely and such measures would possibly create room for other OPEC+ members to raise output. On the demand side, a sharper-than-expected slowdown in developed economies could generate a sizeable surplus, potentially sending prices below USD 50.Copper: Structural pressures aheadDemand in the U.S. during the first half of the year was largely influenced by President Donald Trump&rsquo;s announcement of the possibility of imposing tariffs on copper. Indeed, this led to a large inventory rise in anticipation of the tariffs in the U.S., accompanied by a depletion of inventories elsewhere. Nevertheless, on July 30, it was announced that the tariffs would only apply to semi-finished copper products and copper-intensive derivative products, effectively excluding refined copper from the package. Following the announcement, copper prices sank over 20%.As we reach the end of the year, we anticipate relatively low copper demand in the U.S., as buyers work through the stockpiles they built in recent months. Looking ahead, several forces will shape copper demand in 2026. On the supportive side, the rapid growth of data centers to support AI applications is an increasingly important source of copper demand; for instance, a McKinsey report (<a target="_blank" href="https://www.mckinsey.com/industries/public-sector/our-insights/the-data-center-balance-how-us-states-can-navigate-the-opportunities-and-challenges">here</a>) notes that, in the U.S., data center demand could grow by 20-25% per year through 2030. In addition, the Fed&rsquo;s easing cycle could improve market sentiment and provide a potential feedthrough into the real economy &ndash; particularly via a recovery in construction activity &ndash; may further support copper demand, although this effect could kick in late in 2026 or 2027. On the downside, an overall weak U.S. economy and subdued macroeconomic sentiment could weigh on copper demand, especially as tariffs pass through to inflation or if the U.S. sees a mild recession (30% probability). Moreover, U.S. EV adoption has slowed due to high vehicle costs, limited affordable models, policy uncertainty, weaker incentives, insufficient charging infrastructure, and delays or scale-backs in certain EV projects by manufacturers, tempering the rapid growth seen in earlier years and keeping EV market share relatively flat at around 9-10%.Undoubtedly, copper is highly sensitive to China&rsquo;s demand, as the country accounts for over 50% of global consumption. Recently, much of China&rsquo;s demand has been fueled by inventory accumulation rather than purely end-use consumption, suggesting that a destocking phase next year could translate into softer demand. Several factors influence demand in opposing directions. On the positive side, AI and high-tech manufacturing continue to support copper consumption, driven by government initiatives aimed at advancing these sectors. Another contributing element is expectations of a weaker U.S. dollar, which would make the metal relatively cheaper. Trade-in programs for home appliances, which rely on copper, have historically supported demand, although they may have already reached a peak. On the negative side, the property sector, which has traditionally been a major driver of copper demand in China, remains weak. Additionally, China is likely to face increasing challenges in exporting its products due to tariffs, regulatory changes, and other restrictions in key international markets such as the U.S. and Europe; particularly, if these measures target copper-intensive products, they could weigh on copper consumption.The International Copper Study Group estimates copper mine production to increase by 2.5% in 2026 and for refined copper production to grow by 1.5% next year. The organization sees support from a series of smaller expansions and the start-up of a number of small/medium sized mines in the DRC, Brazil, Iran, Uzbekistan, Ecuador, Eritrea, Greece, Angola, and Morocco. As is common in this industry, disruptions in mines in key countries such as Chile, Indonesia, and Panama have raised concerns of supply shortfalls. While we do not yet see a significant gap between demand and supply, underinvestment, aging mines, and regulatory challenges will sooner or later &ndash; most likely by the end of the decade &ndash; threaten the balance of the copper market.Based on the outlined scenario, we maintain our year-end forecasts for 2025 at USD 9,500 and 2026 at USD 9,800. On the demand side, risks are skewed to the upside; while we remain cautious about copper demand over the next fifteen months amid slow growth in the U.S. and uncertainty in China&rsquo;s domestic and foreign policies, a better-than-expected performance in copper-intensive industries in either country could keep prices above USD 10,000. On the supply side, risks are likewise tilted to the upside, as continued mine disruptions could add further pressure and raise the likelihood of a significant copper deficit.Gold: Beyond the shining rallyGold has shown an exceptional performance year to date, exhibiting a 43% return as of mid-September. The relevant question for us becomes if this rally will last in the next 15 months, and if so, why or why not. To answer this, we consider fundamental to look at the different factors that have backed-up this behavior, which tend to be on the demand side and not much related to supply elements.After the Russia-Ukraine war started in 2022, central bank demand emerged as a cornerstone of global gold demand. A number of central banks &ndash; most notably the People&rsquo;s Bank of China &ndash; accelerated purchases to diversify reserves given the sanctions on Russia FX reserves, hedge against inflation, and reduce reliance on the U.S. dollar in the context of heightened geopolitical and financial uncertainty. Looking ahead, we expect central bank demand to continue through the rest of 2025 and into 2026, albeit at a slower pace compared to the record levels seen in 2022 and 2023. Evidence from a June survey by the World Gold Council (WGC) underscores this trend: 95% of central bank respondents believe global gold reserves will increase over the next 12 months, while a record 43% expect their own institutions to raise holdings during the same period (Figure 2). Moreover, 73% anticipate moderate to significantly lower U.S. dollar exposure in global reserves over the next five years, highlighting gold&rsquo;s role as a strategic diversifier in an evolving monetary landscape.Figure 2: Expected changes in institutional gold reserves over the next 12 months<figure class="image"><img src="https://assets.continuumeconomics.com/storage/uploads/68d1154da7d8b.png" style="width:100%;"></figure>Source: World Gold Council / Continuum EconomicsNote: &ldquo;Don&rsquo;t know&rdquo; was removed as an option from the 2023 survey onwards; totals may not sum to 100% due to rounding.An additional element to factor into the demand equation is investment in gold. In our DM rates chapter, we referenced our forecast for 10-year U.S. Treasury yields, which stands at 3.9% by end-2025 and rise to 4.3% by end-2026. In our equities chapter, we also highlighted that our baseline scenario assumes a 5-10% correction in the U.S. equity market. According to WGC data, gold-backed ETFs recorded their third consecutive month of inflows during August, led by Western funds. In 2026, we expect ETF inflows to moderate as investors reallocate toward the bond market, with gold demand potentially softening amid yields that remain elevated relative to their average over the past decade. In China, however, a weaker U.S. dollar and the possibility of an equity market correction &ndash; reflecting our concerns about weak underlying foundations &ndash; could support both gold demand and investment.A third factor often cited as a contributor to gold demand &ndash; though we view it more as a secondary and speculative force rather than a fundamental driver &ndash; is geopolitical risk. We do not anticipate major escalations in global conflicts, including the Russia-Ukraine war, a potential Chinese invasion of Taiwan (<a target="_blank" href="https://continuumeconomics.com/a/cbf29fe7/taiwan-grey-warfare-or-naval-quarantine">here</a>), or conflicts in the Middle East. We now forecast gold at USD 3,600 by end-2025 and USD 3,700 by end-2026. Risks to this outlook include weaker-than-expected demand from central banks and a correction in gold prices alongside a broader U.S. equity market downturn. Moreover, this year&rsquo;s price increase has attracted rising speculative interest and these are fickle friends that could reverse on a modest or major catalyst.&nbsp; The scale of price gains also means that it is not clear that gold is a portfolio hedge in the scenario of a hard landing in the U.S. economy, which would likely cause a bear market in U.S. equities; major derisking and a dash to U.S. Treasuries.&nbsp;

OPEC+ has entered a new supply cycle, gradually reversing a second layer of voluntary cuts. The latest 1.65 mln b/d tranche is being phased out at 137

Commodities Outlook: Markets in Motion

AMERICAS

ASIA

Commodities-Commentary

September Outlook: Into 2026 -- Market Implications

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