Top of the Morning: CIO Strategy Snapshot - Second half outlook
At a Glance
As we transition into the second half of 2026, the desk believes that the shift in Fed communicative strategies under Chair Warsh, combined with persistent AI-driven market dynamics, will continue to create volatility across asset classes, including FX markets. Per the full note from UBS, despite a positive year-to-date performance with the S&P 500 up approximately 8%, the recent quarter has demonstrated significant market fluctuations, particularly in June. With contrasting performances in equity segments, it's essential that FX traders remain vigilant about these trends as they may signal further shifts in currency pair dynamics.
Key Takeaways
- 01Second half of 2026 is marked by persistent market volatility, driven by Fed policy and AI dynamics.
- 02The recent performance divergence among equity indices signals potential shifts in investor sentiment.
- 03Expectations for U.S. monetary policy under Chair Warsh will be crucial for FX traders.
- 04Current consensus forecasts position USD/EUR at 1.075, with significant firm divergence.
Full Analysis
What the desk is arguing
The desk posits that the emerging volatility in U.S. markets is a precursor to key shifts in monetary policy and asset positioning as the Fed adjusts its approach. This assessment is based on Jason Draho's insights on the current macroeconomic landscape for the second half of 2026, notably highlighting substantial divergences among equity indices as indicators of underlying investor sentiment.
Particularly striking is the behavior of the S&P 500, which posted a near 2% decline during the week ending June 22nd, while the equal-weighted index saw a modest gain of 1.6%. Such behavior emphasizes the potential for rotation in market leadership and suggests that traders should prepare for further volatility that may bleed into FX movements.
Where it sits in our coverage
The current consensus forecasts for USD/EUR place the pair at a target of 1.075, with a range of 1.04 to 1.12. Notable firms include: - jpmorgan targeting 1.10 for March 2026 - bofa projecting a more conservative 1.04 for the same tenor
The desk's outlook aligns with the upper end of this spread, particularly given the anticipated effects of Fed policy changes on currency valuations.
How other firms see it
Aligned firms like jpmorgan and several others share a bullish outlook on the dollar, projecting potential strength against the euro influenced by anticipated Fed tightening. Conversely, bofa presents a contrary view, forecasting a weaker USD.
Key related currency pairs to monitor include EUR/USD and USD/JPY, as shifts in Fed policy could lead to cascading effects on these pairs and broader market sentiment.
Market Implications
Traders should keep an eye on the emerging volatility signals within the S&P 500 as potential indicators for USD movements, particularly against the EUR. Specifically, levels around 1.075 for the EUR/USD pair may act as a critical pivot point based on upcoming macroeconomic developments.
From the original
As the second half of 2026 soon approaches, Jason spends time this week outlining CIO’s macro and market expectations (including expectations for Fed policy under Chair Warsh), and reviews positioning recommendations along with key messages. Plus, a look at the drivers behind rec