Global FX Volatility Outlook 2026
At a Glance
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.
Key Takeaways
- 01FX vol subdued into 2026 on resilient US growth and low central bank action.
- 02Limited further downside from current vol levels; 1Q26 policy events could test the regime.
- 03Recommend buying cheap forward vols over 1Q26 as portfolio hedges.
Full Analysis
What the desk is arguing
J.P. Morgan argues that FX volatility will remain low into 2026, supported by resilient US growth and low central bank activity, but starting levels cap further downside. They highlight that policy events in 1Q26 could disrupt this calm, making cheap forward vols over that period attractive as portfolio hedges.
Where it sits in our coverage
No internal coverage data available on relevant currencies. The desk's view aligns with a consensus that near-term vol compression is extended, but idiosyncratic risks in early 2026 warrant protection.
How other firms see it
No specific firm stances provided in the source.
Market Implications
Expect continued low FX volatility in the near term, but potential for spikes in early 2026 around policy events. Investors may seek tail risk protection via options, supporting vol premiums for 1Q26.
From the original
FX vol remains subdued into 2026 on resilient US growth and low central bank activity, but starting levels limit further downside. Policy events in 1Q26 could test this regime, making cheap forward vols over 1Q attractive as portfolio hedges. Beyond that, FXO trade recommendation
Related speeches
4 itemsGlobal FX: 2H Vol Outlook: Carry the Day, Vol the Tail
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.
Global FX: Wary of complacency in FX
The desk believes that current FX market complacency could be misleading given the geopolitical risks and cyclical pressures highlighted by J.P. Morgan. With energy prices potentially rising due to supply shortages and geopolitical tensions, the desk is particularly focused on the performance of energy importer currencies such as the Euro and Sterling. Per the full note [source], the desk anticipates a stronger dollar against these currencies, especially if oil prices surge towards $120-$130 per barrel, which would exacerbate terms of trade impacts. As the market navigates these dynamics, the potential for a shift in equity performance could further influence FX flows.