Navigating G10 FX Turbulence in 2026: H1 Reflections and the Road Ahead in H2, with a Focus on USDMUR
As we move through the second half of 2026, it feels like it is important to pause and reflect on the significant volatility that brought definition to the G10 FX markets in the first half of this year, while also looking ahead to the key drivers that will likely influence foreign exchange currency movements through the remainder of 2026.
H1 2026: Geopolitics, Shipping Risks and Policy Divergence
The first half of the year was characterised by elevated volatility across the G10 currencies. The primary catalyst was the intensification of tensions in the Middle East, particularly between Iran and the United States, which started in the end of February 2026. Military activity disrupted traffic through the Strait of Hormuz, while uncertainty surrounding temporary ceasefire arrangements kept energy markets unsettled. Brent crude registered significant spikes by trading above the $100, generating classic stagflationary conditions of higher inflation and softer growth outlooks.
The Houthis joining the conflict has intensified geopolitical tensions. Positioned along Yemen’s Red Sea coastline and aligned with Iran, they applied sustained pressure on the Bab el-Mandeb Strait. Even when the frequency of direct attacks declined, the continued threat of missiles and drones, together with blockade language directed at Saudi-linked shipping, prompted many operators to keep diverting vessels around the Cape of Good Hope. This raised freight rates, insurance costs and transit times for both energy and container cargo. The combination of risks at Hormuz and in the Red Sea therefore intensified the inflationary impulse and supported risk-off flows.
Currency performance reflected these pressures unevenly. The Norwegian krone drew support from stronger commodity revenues, while the euro, yen and Swedish krona faced persistent headwinds owing to rising import costs (imported inflation) and weaker confidence. Commodity-linked currencies delivered mixed results, often magnified by rapid changes in risk appetite and growth expectations.
Central banks responded in different ways, further amplifying the volatility level. In June the European Central Bank (ECB) raised its deposit rate by 25 basis points to 2.25%, its first increase since 2023. President Lagarde presented the decision as a necessary response to inflation risks stemming from the conflict, with the Bank lifting its 2026 headline inflation projection to around 3.0% and lowering its growth forecasts. The Federal Reserve, under Chair Kevin Warsh, left rates unchanged but adopted a clearly more hawkish stance, leaving open the possibility of further tightening later in the year. The resulting divergence in policy expectations between a more proactive ECB and a still data-dependent Fed supported periods of dollar strength, particularly in EURUSD. Other G10 central banks navigated similar trade-offs between inflation and growth, contributing to rugged moves in sterling, the yen and commodity pairs.
The chart below illustrates how EURUSD traded across the period, highlighting key levels and market reactions:
Chart 1: EURUSD 2022 to YTD 2026
Carry strategies also attracted interest earlier in the year, supported by still-wide rate differentials and relatively contained volatility in certain segments. In short, H1 demonstrated how rapidly geopolitical developments, proxy activity and divergent monetary policy can reprice currency markets.
Outlook for H2 2026
Volatility is unlikely to disappear in the second half of 2026. Middle East developments remain the most significant source of uncertainty. Any renewed escalation, further disruption to Hormuz traffic or extended ambiguity around ceasefires could keep oil prices elevated. At the same time, the Houthis retain the capacity to influence shipping costs through the Red Sea. Continued threats and recent blockade rhetoric mean that even limited actions can maintain a geopolitical premium in freight rates and energy prices. The risk of coordinated pressure stretching from Hormuz to Bab el-Mandeb would feed into inflation expectations among importing economies while offering some support to commodity currencies. Heightened tension would also tend to reinforce safe-haven demand for the dollar and yen.
Central bank decisions will remain a key driver of relative performance. At its meeting on 29 July 2026, the FOMC left the US policy interest rate unchanged. The Fed Chair highlighted that they are fully committed to restore price stability and the 2% inflation target is something non-negotiable. The European Central Bank may need to deliver additional increases if energy and shipping pressures broaden. The Bank of Japan’s gradual normalisation and the Bank of England’s balancing of growth concerns against persistent inflation will continue to shape their respective crosses. Stronger US data relative to Europe could also widen growth differentials and support selective dollar strength in the near term, even as longer-term expectations still point toward eventual easing.
The carry strategies will still retain appeal across a number of G10 pairs. Wide rate differentials and relatively low volatility in some segments have created a constructive environment. However, any sharp risk-off episode, whether triggered by a geopolitical flare-up involving the Houthis or Iran, disappointing data or a sudden shift in sentiment could still result to a rapid position unwinds. Over a longer horizon, a softer-dollar theme may reassert itself if major central banks resume easing cycles.
USDMUR in Focus
For Mauritius, USDMUR has been particularly important given the economy’s dependence on tourism and its high reliance on imported energy, food and consumer goods. During H1 the pair traded across a wide range, moving from approximately 45.00 early in the year to levels above 48.00 in late June and this momentum was maintained in July.
The June rise was driven mainly by broad dollar strength. Domestic factors also played a role. Higher import costs, especially for oil and related products, were exacerbated by elevated global shipping expenses linked to both Red Sea and Hormuz risks. These added to inflationary pressure, while fluctuating tourism arrivals and trade balances contributed further episodic weakness. The episode again underscored Mauritius’s sensitivity to global commodity prices and shifts in international risk sentiment.
Looking into H2, USDMUR still faces upside risks if dollar strength owing to ongoing geopolitical uncertainty. Conversely, any meaningful de-escalation in the Middle East, including a reduction in Houthi-related threats to Red Sea shipping and combined with lower oil prices or stronger domestic data could provide the rupee with more meaningful support.
Closing View
H1 2026 illustrated how closely geopolitics, energy and shipping shocks, proxy activity and divergent central-bank policy can interact to drive FX volatility. The Houthis’ ability to maintain pressure on a second maritime chokepoint made the overall impact more far-reaching than a Hormuz-only escalation would have been. As the second half unfolds, adaptability will remain important. Developments in the Middle East, the path of key central banks, and the evolution of commodity and shipping costs are likely to remain the dominant influences on currency markets.
