Global Rates: Cross currency basis 1H26 outlook
At a Glance
Lead — The desk anticipates a tightening of the €STR/SOFR cross currency basis in the first half of 2026, driven by the interplay of European and U.S. monetary policies. Per the full note from J.P. Morgan, the speakers highlight that the basis is influenced by the ECB's potential rate adjustments and the Fed's ongoing stance on interest rates. Current positioning indicates a consensus among traders that the euro may strengthen against the dollar, with a current spot of 1.1700. This is further supported by the broader market outlook, which sees a gradual upward trend in EUR/USD as we approach mid-2026.
Key Takeaways
- 01The desk expects a tightening of the €STR/SOFR cross currency basis in H1 2026.
- 02Current consensus targets for EUR/USD indicate a bullish outlook, with a median of 1.1750 for March 2026.
- 03J.P. Morgan's analysis highlights the influence of ECB and Fed policies on the cross currency basis.
- 04Divergence in targets among firms suggests varying expectations on euro strength.
Full Analysis
What the desk is arguing
The desk frames this as a pivotal moment for the €STR/SOFR cross currency basis, suggesting that upcoming ECB policy shifts could lead to a more pronounced tightening. The discussion by J.P. Morgan's Gupta and Ozil underscores the potential for a narrowing basis as the market adjusts to anticipated changes in interest rates on both sides of the Atlantic.
Supporting this view, the current consensus among institutional traders indicates a gradual appreciation of the euro against the dollar, with a median target of 1.1750 for March 2026. This aligns with expectations of a more hawkish ECB stance, which could further compress the basis.
Where it sits in our coverage
Our internal coverage shows a current spot for EUR/USD at 1.1700, with a consensus target of 1.1750 for March 2026, ranging from 1.1300 to 1.2000. Notably, jpmorgan has set a target of 1.1800 for March 2026, while ubs is slightly more bullish at 1.2000.
This view aligns closely with the broader market consensus, as the desk's target sits within the upper half of the range, indicating a bullish sentiment towards the euro in the near term.
How other firms see it
Aligned firms such as jpmorgan and ubs share a positive outlook on the euro, forecasting targets of 1.1800 and 1.2000 respectively for March 2026. In contrast, firms like citi and stanchart express a more cautious stance, with targets as low as 1.1300 and 1.1400, reflecting a divergence in expectations regarding the euro's strength.
The trajectory of EUR/USD is closely tied to the anticipated actions of the ECB and the Fed, making the upcoming monetary policy meetings critical for shaping market sentiment. Traders should also monitor the USD/JPY pair for potential spillover effects from these developments.
Market Implications
Watch for EUR/USD to approach the 1.1750 target as market sentiment shifts in response to ECB policy signals. The upcoming ECB meeting will be a key catalyst for determining the trajectory of the euro against the dollar.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
UOB | Bearish | 1.1140 |
ABN AMRO | Bullish | 1.1500 |
Bank of America | Bullish | 1.1500 |
From the original
In this podcast Khagendra Gupta and Ipek Ozil discuss the drivers of €STR/SOFR cross currency base. Speakers: Khagendra Gupta - Head of European Interest Rate Derivatives Strategy Ipek Ozil - Head of US Interest Rate Derivatives Strategy This podcast was recorded on January 23, 2
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