Global FX: 2H Vol Outlook: Carry the Day, Vol the Tail
At a Glance
The desk anticipates a gradual increase in FX volatility during the second half of 2026, driven by depressed volatility levels and ongoing economic resilience. Per the full note from J.P. Morgan, though volatility has receded to post-COVID lows, the environment favors carry strategies due to attractive carry-to-vol ratios. As such, the emphasis is on strategies around the carry, particularly in low-yield pairs such as euro and Swiss yen. With no major economic catalysts expected imminently, traders should position themselves for a slow rise in volatility, leveraging favorable options setups.
Key Takeaways
- 01FX volatility is expected to gradually increase in 2H 2026.
- 02Current levels are approximately two standard deviations below average, suggesting room for upward adjustment.
- 03Carry strategies, particularly in low-yield crosses like euro and Swiss yen, are favored.
- 04Lack of immediate catalysts means a slower volatility uptick is likely.
Full Analysis
What the desk is arguing
The desk expects a rebound in FX volatility in the latter half of 2026, as we start from historically low volatility levels against a backdrop of solid economic fundamentals. According to commentary by J.P. Morgan, the current volatility levels are approximately two standard deviations below the average of the global business cycle, suggesting significant room for an uptick.
Though macroeconomic conditions remain stable, the absence of a major triggering event means that volatility will likely move higher gradually. The focus on carry strategies remains strong, especially through options, as carry-to-vol ratios appear favorable, notably in pairs like the dollar vs. Hong Kong dollar.
Where it sits in our coverage
Currently, our consensus target for the FX market highlights 1.075, with specific firm targets for December 2026 configured as follows: - jpmorgan: 1.10 - bofa: 1.04
This aligns closely with jpmorgan's forecast position, placing our view at the upper end of the range, signaling a potentially optimistic market outlook.
How other firms see it
Firms such as jpmorgan appear to align with this perspective, indicating a broad expectation for heightened volatility due to the current macroeconomic climate. Conversely, firms like bofa express a more cautious stance based on differing economic signals.
Indicators such as the EUR/USD trajectory and potential monetary policy changes from central banks will be integral to the unfolding narrative around FX volatility adjustments.
Market Implications
Traders should observe the carry-to-vol ratios, specifically in dollar vs. Hong Kong dollar scenarios, and be positioned to capitalize as volatility gradually rises toward 1.10.
From the original
Ladislav Jankovic, Arindam Sandilya and Sanjana Shinde discuss the outlook for FX volatility in 2H26. This podcast was recorded on 18 June 2026. This communication is provided for information purposes only. Institutional clients can view the related report at https://www.jpmm.com
Related speeches
4 itemsFX Daily: Surprisingly low volatility keeps carry trade dominant
Current FX conditions, marked by surprisingly low volatility, have rendered carry trades particularly appealing for traders navigating this cautious environment. According to the full note by ING, the subdued risk appetites globally contribute to the carry trade's prevailing allure. This trend is underscored by consistent positioning towards higher yielding currencies, especially as central banks maintain accommodative stances. With upcoming market events sparse, the prevailing low-volatility backdrop is likely to sustain these trading patterns in the near term, allowing for continued dominance of carry strategies.
Global FX Volatility Outlook 2026
The desk anticipates subdued FX volatility extending into 2026, driven by resilient US economic growth and a lack of significant central bank activity. Per the full note from J.P. Morgan, the current low levels of volatility may limit further downside, but upcoming policy events in Q1 2026 could challenge this stability. The desk highlights the attractiveness of cheap forward volatility as a hedge during this period, while also recommending a focus on European growth and Antipodean currencies. This perspective aligns with our consensus view, which targets a EUR/USD level of 1.075, within a range of 1.04 to 1.12.
Global FX: Bearish EUR factors intensify, USD decouples from real rates, and an update on low FX vols
The desk anticipates that the recent accumulation of bearish factors surrounding the Euro (EUR) continues to pose significant headwinds, particularly as the U.S. dollar (USD) appears increasingly disconnected from prevailing real rates. Per the full note from J.P. Morgan, the current environment offers an important inflection point where geopolitical developments and economic data releases are likely to shape the trajectory of major currency pairs. The commentary highlights the dynamic around the EUR, noting several contributing factors that could accelerate its decline, particularly as on-going monetary policy adjustments unfold in the Eurozone. Additionally, the current outlook on low FX volatility presents a significant backdrop against which institutional traders should calibrate their strategies for tactical positioning in FX trading.
The Know: In Focus
In the latest commentary from J.P. Morgan Wealth Management, the desk emphasizes the cautious approach investors should adopt amid uncertain market dynamics, highlighting potential volatility from global economic signals. Per the full note, there is a growing concern around central bank policies as inflation remains sticky across economies, which could keep traders on edge. The desk notes that while the USD has shown resilience, hard macro data could shift investor sentiment quickly. The firm details its forecast within the broader spectrum of institutional sentiment, aligning with a target of 1.075 for EUR/USD, with forecasts from peer institutions creating a clear target range.
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