The front end of 2025 saw significant market turbulence, fuelled by uncertainty over President Trump’s tariff policies with the US dollar falling by around 10% against various currencies as markets lost faith in US Inc as well as questioning the Federal Reserve’s independence.
Evidence that negativity around the US economy, particularly with the job market, can be seen in the number of interest rate cuts that are currently being priced in by markets. However, the September Fed meeting showed a divergence amongst Fed members about the path of future policy, raising the question of whether too many rate cuts are being priced in.
Should US inflation start to rise again, markets will likely reduce the number of rate cuts being priced and we could well see a continuation of the dollar’s recent rally.
As we come into the end of the year, there has been a shift in markets: now showing concern in the UK economy, with 30-year gilt yields at their highest since the 1990s. The UK’s Autumn Budget is shaping up to be a major fiscal event, as the Chancellor considers a balance of unpalatable tax rises to plug holes in public finances. It is worth noting that the previous two Labour Budgets and the infamous mini-budget of 2022 all triggered sharp sterling swings.
While much of the focus has centred on USD, the EUR has had a standout year, with GBP/EUR down 7% and EUR/USD up 14% year-to-date. This was driven by resilient data, a hawkish ECB, and a softer dollar backdrop. Eurozone growth held up better than feared - Germany avoided a deep recession while southern Europe remained strong - prompting a reassessment of last year’s bearish EUR sentiment. The ECB’s “higher-for-longer” stance narrowed the yield gap with the Fed, boosting carry appeal. Meanwhile, moderating US inflation and fading “US exceptionalism” weighed on USD, encouraging flows back into EUR. Falling energy prices and a restored trade surplus added structural support, while real money inflows into euro assets provided a steady tailwind throughout the year.
Building these sensitivities into forecasts now is critical. Scenario modelling for USD, EUR and GBP exposures, including potential divergence between the two currencies, matters not only in the short term, for day-to-day cash flow, but also for how group earnings appear in consolidated accounts. For treasurers, this requires a renewed focus on earnings-at-risk analysis.
The autumn’s uncertainty also presents challenges for existing commercial agreements. Long-term contracts written in USD, GBP or EUR may no longer reflect economic reality for either side come the end of the year. Counterparties will also be reviewing their positions: suppliers and customers may look to adjust payment terms in their favour.
If suppliers are unable to deliver in accordance with USD or EUR, due to unforeseen events such as natural disasters, hedging contracts for those purchases could become redundant. The company would then need to unwind or adjust the hedge by entering an offsetting transaction to close out the position. The financial impact depends on market movements since the hedge was originally established; a gain or loss may be realised, even though the underlying transaction did not occur. From an accounting perspective, the hedge relationship would no longer meet hedge accounting criteria, requiring reclassification of any associated gains or losses.
Treasurers can work closely with legal and procurement teams to anticipate these pressures and protect the business from unfavourable renegotiations for 2026. Instead, terms could be proposed proactively to build in greater flexibility, particularly around payments and FX clauses.
The dollar’s role as the world’s reserve currency means its weakness or strength affects more than direct US trade. A European exporter selling into Asia, or a UK manufacturer sourcing components from Latin America, may find that sudden swings in non-core currencies affect payment values and hedging needs. Treasurers need to monitor these secondary exposures carefully and not assume that the impact stops with the dollar or pound.
For 2026, it is vital to review GBP/USD/EUR positions alongside wider exposure. The answer is to revisit hedging strategies holistically. This means reviewing not only the cost of dollar protection, but also correlated positions in other currencies, and considering which mix of tools – best supports corporate risk appetite.
As we await the impact of upcoming US Fed and ECB meetings and the UK's Autumn Budget, here are five actions you can be taking now to mitigate further volatility:
Dollar weakness in 2025 demonstrated the potential of hedging to maintain consistency and stability. The same attention now needs to shift to sterling. Using hedging tools effectively - such as forward contracts - treasurers can turn likely macroeconomic market uncertainty into managed strategic risk. By taking a forward-looking, strategic approach to forex, hedging, contracts, and reporting now, treasurers can protect their own budgets for 2026.
Thanim Islam is head of FX strategy at Equals Money