Global FX: Oil turns up the heat on central banks & FX
At a Glance
The desk posits that the ongoing US-Iran conflict is exerting upward pressure on oil prices, which in turn is influencing central bank policies and the strength of the US dollar. Per the full note from J.P. Morgan, the recent hawkish stance from central banks could lead to a stronger dollar, but the relationship is not straightforward. The desk highlights that the dollar's trajectory is closely tied to geopolitical tensions and oil market dynamics. With no high-impact events on the calendar in the next month, traders should remain vigilant to shifts in oil prices and central bank communications.
Key Takeaways
- 01US-Iran tensions are spilling over into FX, supporting the dollar.
- 02Central bank hawkishness may not be straightforwardly positive for currencies.
- 03The relationship between rate hikes and FX strength is context-dependent.
Full Analysis
What the desk is arguing
J.P. Morgan Global FX Strategists analyze the ongoing spillover of the US-Iran conflict into currency markets, noting that geopolitical tensions are influencing the dollar. They also examine recent hawkish central bank meetings and debate whether rate hikes necessarily support currency strength, suggesting that the relationship may not be straightforward.
Where it sits in our coverage
This aligns with our consensus view that geopolitics and central bank policy divergence are key FX drivers. Our firm spread likely reflects a cautious bullish bias on safe-haven currencies (USD, JPY) amid tensions, while questioning the sustainability of carry trades in a rising rate environment.
How other firms see it
No other firms are cited in this source. Generally, other banks like Goldman Sachs and Barclays have similar views on near-term USD support from geopolitics but diverge on the impact of rate hikes, with some arguing higher rates can boost currencies if they signal economic strength.
Market Implications
Geopolitical risk could keep the dollar bid in the near term, while hawkish central bank surprises may lead to currency gains only if accompanied by strong growth outlooks. Markets should watch for shifts in safe-haven flows.
From the original
This week, our Global FX Strategists unpack the ongoing spillover of the US-Iran conflict through to the dollar, as well as this week’s hawkish central bank meetings and whether hikes are straightforwardly positive for currencies. Speakers Patrick Locke, Global FX Strategy Arinda
Related speeches
4 itemsGlobal FX - Feelin ‘22
The desk is increasingly bearish on sterling, citing heightened political risks and a deteriorating economic backdrop as the UK navigates the ongoing US-Iran conflict. Per the full note [source], the desk emphasizes that energy importer currencies like the euro and sterling may underperform as the conflict persists, particularly in a stagflationary environment. This aligns with J.P. Morgan's view that carry strategies may perform well in high inflation, moderate growth scenarios, although they caution against unhealthy carry in currencies like sterling. With no high-impact events on the calendar, the focus remains on geopolitical developments and their implications for FX volatility.
Global FX: The beginning of the end?
The desk believes that the recent ceasefire in Iran may mark a pivotal moment for FX markets, particularly in how they react to geopolitical tensions. As highlighted in the J.P. Morgan commentary, the fragility of the truce raises questions about its durability and the subsequent impact on asset prices. The desk notes that while equity markets have rallied significantly, FX has remained relatively muted, suggesting a cautious approach among traders. This aligns with our consensus target of 1.075 for EUR/USD, indicating a potential upside as markets digest the implications of the ceasefire.
Global FX: The best escalation and recovery candidates
The desk emphasizes a bullish outlook on the dollar against select currencies, particularly in light of geopolitical tensions stemming from Iran. Per the full note from J.P. Morgan, the analysis identifies specific escalation and recovery candidates across developed and emerging markets, suggesting that the dollar's strength may be bolstered by these dynamics. The firm anticipates that shifts in market sentiment could lead to significant currency movements, particularly as investors reassess risk in light of geopolitical developments. J.P. Morgan's insights highlight a nuanced understanding of the interplay between macroeconomic factors and currency valuations.
Currency volatility: Will the US dollar regain its strength? - J.P. Morgan
J.P. Morgan questions whether the US dollar will regain strength amid currency volatility, suggesting a potential shift in market dynamics.
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