Fed Rate Cuts Imminent: How Will USD/CNY Evolve in 2025-2026?

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Under the dual influence of the Fed rate cut cycle starting and diverging US-China economic policies, the RMB is expected to enter a mild, gradual appreciation channel in 2025-2026. Market consensus expects the federal funds rate to fall to a median level of 3.6% in 2025; this change is the main external driver weakening USD asset attractiveness and guiding the USD index downward.

At the same time, the People’s Bank of China’s macro-prudential management will guide the exchange rate to remain basically stable at a reasonable equilibrium level. This means the RMB appreciation process will be steady and orderly with two-way fluctuations, rather than unilateral sharp rises, aiming to stabilize market expectations.

Key Highlights

• In 2025-2026, the RMB will appreciate mildly. Fed rate cuts weaken the USD, while China’s economy remains stable.
• Fed rate cuts are the main reason for RMB appreciation. Rate cuts reduce USD attractiveness, causing the USD index to decline.
• China’s stable economic growth and large trade surplus provide solid support for the RMB exchange rate.
• The PBOC will manage the exchange rate to avoid rapid RMB appreciation. The central bank will ensure exchange rate stability.
• In 2025, USD/CNY is expected in the 6.95 to 7.35 range. In 2026, the RMB may challenge 6.85.

Core Drivers: Key Variables Affecting Exchange Rates

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The core drivers affecting USD/CNY exchange rate trends in 2025-2026 mainly come from external cyclical USD weakness and internal support from China’s economic fundamentals. These two forces jointly create conditions for mild RMB appreciation.

USD Index Downtrend and Narrowing US-China Interest Rate Differential

The Fed rate cut expectation is the most critical external variable affecting exchange rate trends. Rate cuts will directly narrow the US-China interest rate differential, weakening USD asset attractiveness and guiding changes in international capital flows. This process will pressure the USD index (DXY) downward. Multiple institutions predict the USD index will enter a softer channel in 2025.

Bank of America’s analysis also points out that with inflation stabilizing and rate cuts landing, the USD will maintain range-bound fluctuations in the second half of 2025. Overall USD weakness opens external space for RMB appreciation.

Internal Support from China’s Economic Fundamentals

China’s steady economic performance is the “ballast stone” for the RMB exchange rate. China’s official annual growth target is around 5%, and the World Bank predicts 2025 growth at 4.9%, showing strong economic resilience. Persistent trade surpluses provide stable forex inflows, offering solid support for the RMB exchange rate.

Latest data shows China’s November 2025 trade surplus expanded to $111.7 billion, far exceeding market expectations. Among them, exports grew 5.9% year-over-year, showing strong external demand.

Solid economic fundamentals enhance market confidence in the RMB, allowing it to remain relatively stable amid global economic fluctuations.

PBOC’s Expectation Management and Policy Tools

The People’s Bank of China plays the role of “stabilizer” in exchange rate management. Its goal is to maintain basic stability of the RMB exchange rate at a reasonable equilibrium level, rather than allowing unilateral sharp rises. To achieve this, the central bank has a rich policy toolbox:

• Guiding market expectations by setting daily reference rates and introducing “counter-cyclical factors”.
• Instructing state-owned banks to conduct market operations when necessary to smooth excessive fluctuations.
• Adjusting USD deposit rates to encourage enterprises and individuals to convert forex earnings to RMB.

Additionally, China holds over $3.3 trillion in the world’s highest foreign exchange reserves, providing ample “ammunition” for central bank interventions to stabilize USD/CNY exchange rates. These policy tools ensure the RMB appreciation process is gradual and controllable.

2025-2026 Exchange Rate Trend Phased Forecast

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Combining forecasts from multiple institutions with market dynamics, we can provide a phased outlook for exchange rate trends in the next two years. Overall, mild RMB appreciation is the high-probability event, but the process will be gradual and full of fluctuations.

2025 USD/CNY Exchange Rate Range: 6.95-7.35

2025 will be a turning year for exchange rate trends. In the first half, market focus will be on realization of Fed rate cut expectations. With the first rate cut landing, the USD index may decline faster, driving rapid RMB appreciation, with the exchange rate approaching the 7.00 integer mark. Goldman Sachs and other institutions’ predictions support this view, considering the start of the rate cut cycle as the core catalyst for RMB appreciation.

Entering the second half, as the rate cut pace stabilizes, exchange rate trends will be more guided by PBOC policies. The central bank is expected to use macro-prudential tools to avoid unilateral overly fast appreciation, stabilizing fluctuations within a specific range. Longforecast and other data models predict the exchange rate median may stabilize around 7.10 by end-2025.

From a technical perspective, multiple key levels will affect 2025 exchange rate fluctuations:

• 7.00 is an important psychological and technical mark. Effective break below will open space for further appreciation.
• 6.95 is a key support below. After breaking below 7.00, the exchange rate may find support near this level, forming a phased bottom.

Therefore, throughout 2025, USD/CNY is expected to operate in a wide 6.95 to 7.35 range, showing a pattern of fast early and steady later.

2026 Appreciation Trend Outlook: Challenging 6.85 Key Level

Looking to 2026, new variables affecting exchange rates will emerge, the most critical being US economic health. If the US economy slows or mildly recesses due to lagged effects of prior high rates, the Fed may adopt looser monetary policy, further weakening the USD.

At that time, the market will closely watch the following US economic leading indicators:

• Labor Market Softening Signs: For example, small business wage growth slowdown, increased layoff announcements, etc., potentially signaling rising unemployment.
• Consumer Spending Changes: Consumer spending is the last buffer for the US economy. Any weakening in middle- and low-income household spending power may trigger economic contraction.
• GDP Growth Data: If US real GDP growth turns negative in the first half of 2026, confirming recession expectations, exerting significant downward pressure on the USD.

Against China’s steady growth background, if the US economy weakens, USD/CNY will have momentum to challenge lower levels. Technical analysis shows 6.85 is an important long-term target. Breaking this level means the RMB returns to strong levels from early 2020.

Key Time Nodes and Market Observation Points

For market participants, grasping key time nodes is crucial. The following are events to focus on in 2025-2026:

1. Fed FOMC Meetings: Every interest rate meeting may trigger market volatility. Especially post-meeting policy statements and Chair Powell’s speeches will provide clues for future rate paths.
   • January 28-29
   • March 18-19
   • May 6-7
   • June 17-18
   • July 29-30
   • September 16-17
   • October 28-29
   • December 9-10
2. China Key Economic Data Releases: China’s economic performance is the internal support for the RMB exchange rate. Trade data and quarterly GDP are core indicators measuring its health.

Closely monitoring these time points, combined with economic data and policy signals from both US and China, will help more accurately judge short-term exchange rate fluctuation directions.

Potential Risks and Multi-Scenario Analysis

Although mild RMB appreciation is the baseline forecast, market trends never lack variables. Future exchange rate paths will depend on multiple factors’ evolution. Therefore, multi-scenario analysis is crucial for comprehensively understanding potential risks.

Baseline Scenario: Fed Cuts as Expected with Stable China Economy

This is the most likely scenario. Under this, the Fed starts the rate cut cycle as market expects, US various rate indicators steadily decline.

Meanwhile, China’s economy maintains steady operation. Although most forecasters believe actual growth will slow, nominal growth improves due to inflation rebound.

However, China still needs to address overcapacity and deflation pressure. Inflation rate expected to remain at 0.40% low by end-2025, providing monetary policy stability space.

Against this background, narrowing US-China differentials open the way for RMB mild appreciation as scheduled.

Risk Scenario One: Stubborn US Inflation Delays Cuts

This scenario poses the biggest external resistance to RMB appreciation path. If US inflation remains high due to the following factors, the Fed will be forced to delay or reduce rate cuts:

• Expansionary Fiscal Policy: Tax cuts and other measures continue stimulating high-income household spending.
• Tight Labor Market: Tightening immigration policy may limit labor supply, pushing wage costs higher.
• Core Cost Rise: Excluding housing costs, inflation trends may still be broadly rising.

If this scenario occurs, market expectations for rate cuts will be significantly revised. The USD will gain support from “higher rates for longer” expectations, strengthening the USD index, exerting depreciation pressure on the RMB.

Risk Scenario Two: Proactive Easing by China Monetary Policy

This scenario is the main internal risk affecting exchange rates. If China’s economy faces greater-than-expected downward pressure, such as sustained slowdown in household consumption growth, the PBOC may adopt more proactive easing monetary policy to stimulate the economy. This may include significantly cutting the Loan Prime Rate (LPR). Such operations would be interpreted by the market as “deliberate actions” to guide RMB weaker to support exports, as strong RMB would weaken Chinese goods’ price competitiveness.

Risk Scenario Three: Escalating Global Geopolitical Conflicts

“Black swan” events are risks not to be ignored. History shows that during major global crises (like 2008 financial crisis and early 2020 pandemic), the USD’s status as the primary global safe-haven asset stands out. Due to the huge size and stability of the US economy, global investors flock to USD assets for safety during panic. This “flight to USD” trend will push the USD index higher, pressuring almost all non-USD currencies including the RMB, causing USD/CNY to rise.

Overall, the general trend for USD/CNY in 2025-2026 is mild appreciation, but the process will be full of two-way fluctuations; market participants need to remain vigilant.

Risk management suggestions for different entities:

• Foreign Trade Enterprises: Actively use financial tools to hedge exchange rate risks. For example, forward forex settlement and sales and forex options can help lock future transaction costs and revenues.
• Individuals and Families: Individual investors can consider diversifying asset allocation, increasing non-USD asset exposure to diversify risks. For those with overseas consumption needs like students, batch currency exchange through platforms like Biyapay is an effective way to smooth exchange rate fluctuation impacts.

FAQ

What Does RMB Appreciation Mean?

RMB appreciation means converting the same amount of RMB requires fewer USD. For example, USD/CNY falling from 7.20 to 7.00 indicates the RMB becoming more valuable relative to the USD. This lowers import goods costs.

Will the RMB Appreciate Rapidly and Sharply?

Market consensus expects no. The PBOC aims to maintain basic exchange rate stability and will use policy tools to smooth excessive fluctuations. Therefore, the appreciation process is expected to be mild with two-way fluctuations, not unilateral sharp rises.

When Should Individuals Exchange Currency?

Predicting exact exchange rate highs and lows is very difficult. For those with ongoing needs, such as students abroad, adopting batch exchange strategy can effectively smooth costs and reduce risks from single exchange rate fluctuations.

What is the Biggest Risk to This Forecast?

The biggest external risk is stubborn US inflation. If inflation remains above expectations, the Fed may delay rate cuts. This will support USD strength, delaying or reversing RMB appreciation trend.