2026 Global Central Bank Divergence: Europe, Australia, and Canada May Shift to Rate Hikes, While the Fed Becomes One of the Few Cutting Rates?

Markets are betting that the Eurozone, Canada, and Australia may raise interest rates next year, while the Federal Reserve is expected to continue cutting rates, narrowing interest rate differentials and putting pressure on the US dollar. A rare divergence in global central bank policies could exacerbate the dollar’s decline. This article is sourced from Wallstreetcn and compiled, translated, and written by Foresight News.

(Previous context: 2026 Fed Leadership Change: The End of the Powell Era, US Interest Rates May Be “Cut All the Way Down”) (Background Supplement: Trump: Rate Cuts Are the Litmus Test for the Fed Chair, May Adjust Tariffs to Lower Some Product Prices)

Global central bank policies are experiencing a rare divergence. Investors are increasingly betting that the Eurozone could raise rates as early as next year, while the US continues to cut rates. This reverse move could further depress the already weak dollar.

Swap market pricing shows that the odds of an ECB rate hike in 2026 now exceed those of a rate cut. In contrast, the Fed, widely expected to cut rates at this Wednesday’s meeting, is projected to cut at least twice more next year. Investors are also betting that Australia and Canada will raise rates next year, while the Bank of England is expected to bottom out in the summer.

This policy divergence could intensify the dollar’s decline. So far this year, the dollar has fallen more than 8% against a basket of currencies. Traditionally low-rate economies like the Eurozone and other major economies are now facing policy shifts, partly because the impact of Trump’s trade war on US trade partners has been milder than expected.

TD Securities’ Pooja Kumra describes next year as a potential “turning point” for the central banks of the Eurozone, Canada, and Australia, adding: “Hawkish voices are getting louder.”

Hawkish Expectations Reshape Market Pricing

Swap market data vividly reflect this reversal. According to market data cited by the Financial Times on the 9th, current pricing suggests Eurozone rates will be raised by an average of 10 basis points by the end of next year; as recently as the end of last week, the market had expected a 4-basis-point cut.

This shift in sentiment has been confirmed by policymakers and analysts. According to Bloomberg on Monday, ECB Executive Board member Isabel Schnabel said she felt “quite comfortable” with investors betting on a Eurozone rate hike next year. Tomasz Wieladek, Chief European Macro Strategist at T Rowe Price, pointed out that the global tariff shock has been much milder than initially expected, and central banks worldwide are becoming increasingly hawkish.

TD Securities’ Pooja Kumra describes next year as a potential “turning point” for the central banks of the Eurozone, Canada, and Australia, emphasizing that “hawkish voices are getting louder.” As a result, global bond yields rose on Monday, with the German 10-year government bond yield jumping 7 basis points to 2.87%. It has since retreated to 2.847%.

Economic Data Supports Policy Divergence

In sharp contrast to the hawkish turn in Europe and commodity currency countries, the Fed’s dovish path now seems set. Against a backdrop of continued pressure from Trump to lower borrowing costs, markets widely believe a Fed rate cut at Wednesday’s meeting is all but certain, with at least two more cuts expected next year.

However, stronger-than-expected data from other major economies are undermining the rationale for following the Fed’s rate cuts:

Canada: Strong November employment data has prompted traders to price in a small possibility of a Bank of Canada rate hike early next year. Australia: Given last week’s robust household spending data, markets are now pricing in a small but notable possibility of a Reserve Bank of Australia rate hike in February. Japan: Since the Bank of Japan began raising rates last year, after the governor hinted earlier this month, traders now price in at least two 25-basis-point hikes by the end of 2026. UK: While traders expect the Bank of England to cut rates from the current 4% next week, the market is only fully pricing in one more 25-basis-point cut thereafter. The Organisation for Economic Co-operation and Development ((OECD)) said last week that BOE rate cuts will stop in the first half of 2026.

Dollar Faces Further Revaluation

Interest rate differentials are a key driver of exchange rates, with lower rates typically reducing the appeal of holding that currency for investors. Currently, due to slower economic growth, rates in the Eurozone and several other major economies are below those in the US, but this gap is narrowing.

ING analyst Chris Turner points out that if the Fed maintains its dovish stance, the policy shift in overseas rate cycles will be another factor leading to a moderate weakening of the dollar in 2026. This policy divergence could further exacerbate the dollar’s decline; since the start of the year, the dollar has fallen more than 8% against a basket of other currencies.

As some regions ((such as the Eurozone)) continue to see elevated services inflation and improving economic data, non-US central banks have little incentive to cut rates further to stimulate growth. If the Fed alone maintains a rate-cutting cycle in 2026, a reversal in global capital flows could pose severe challenges for the dollar in the coming year.

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This article, “Global Central Bank Divergence in 2026: Europe, Australia, Canada May Shift to Rate Hikes, While the Fed Becomes a Rare Dovish Outlier?” was first published on BlockTempo, the most influential blockchain news media.