Global FX: Central banks take centre stage

Hello, and welcome to this At Any Rate podcast. I'm your host, Arindam Sandilya from J.P. Morgan's FX Strategy team.

I'm joined today by my colleagues, Junior Tanase, Patrick Locke, and Octavio Popescu to discuss what looks like a full slate of central bank meetings next week. But just as a recap of the week gone by, there were a few things that we potentially learned that we can stow away as lessons for next week. First, you know, despite softish CPI and PPI prints in the U.S., there were other pockets in DiEM like Norway, like Japan, where you did get some inflation numbers, not always tier one, which did surprise to the upside.

So I guess this pan-DiEM issue of inflation will remain live for central banks in coming months and we'll grapple with this as we go along. Second, I think the market was genuinely surprised by the hawkishness of the ECB staff forecast. We got this week alongside the widely anticipated 25 basis point rate hike.

And now the question is if Europe can revise up its core inflation outlook by two tenths after accounting for a hawkish rate rate path, despite being a relative casualty of the energy shock. Now, what does that say about the respective price pressures in other parts of the world where these price pressures are a lot less acute? And then we did get late week some Iran Peace deal related headlines.

I'm not really sure how much we want to discuss that particular issue, despite the obviously material effects on rates and effects, because we've seen these headlines, got many head fakes over the last three, four months. Now, lest we forget, 48 hours back, the concern in markets was of an uglier escalation. But it is notable that Brent is now trading well below $90 a barrel at the time of recording this podcast.

There was some news earlier in the week that flow of energy through the strait was greater than at any point since the war began. So it's not surprising that risk markets have taken these developments particularly well. And FX carries had a good run in the last 36 to 48 hours.

But having said that, the US real yields are still net higher on the week and the dollar does still screen cheap relative to rates, as we've been mentioning on this podcast for the last several weeks. So going into next week's very crucial Fed meeting, we like this kind of set up, this semi barbell suite of views where we are bullish on both FX carry and the dollar simultaneously in dollar, particularly versus the low yielders, which for you, Patrick Locke, is a convenient segue into the discussion on next week's Fed meeting. Obviously, several moving parts with a new chair at the helm.

So I'll just leave it to you to discuss this in any which way you deem fit, how you basically seeing dollar risks around the event and sort of filter all your views through that lens. Yeah, thanks, Arindam. Look, it's a major event next week.

There's no other way to put it. I think, as you've kind of said, we have some pretty definitive clarity on what the rate decision is going to be. But after that, I think it's it's anyone's guess.

So I definitely have some thoughts, but I think I'm taking a particular degree of humility into this event, given it's, you know, Chair Warsh's first and we've only really heard from him so far in Senate banking testimony. But look, I would start by framing it with kind of like what has changed in the kind of the months since his original nomination. You know, first and foremost, you've had the energy inflation shock, you know, the core spillover in the CPI so far hasn't been altogether that bad, according to evidence this week.

PPI, though, we're seeing some upside surprises. We've taken up our core PC forecast, the 30 basis points, which is still reasonably firm. And then maybe even the bigger delta is, you know, not only labor market stabilization in the last couple of months, but tacking on kind of the revisions to last week's NFP, the three month trend is actually looking reasonably strong compared to what we had thought we had been looking at back in January.

So those two things together paint obviously a reasonably different picture of the U.S. macro condition as he takes the seat this week and how and whether that kind of like influences his tone in the press conference is obviously going to matter a great deal. Just, you know, we're still waiting on our on our economists forecast and a preview for the for the meeting. But just kind of like mechanically, you know, I always start with the SEP first, what we might expect to change.

We've taken down our year end unemployment rate forecast to four one. The Fed's last SEP estimate was four point four in the median for the U rate. So perceivably there's some room to move down when shock me if you have activity GDP estimates nudged up a little bit.

We'll see what happens on corn headline inflation estimates. But again, all of that continues to point to, you know, to a more constructive and firmer backdrop than we had at the March SEP. So in terms of dots, then, you know, certainly I think most people are expecting the median cut to be neutralized for twenty six TBD on what happens in twenty seven.

You know, is that neutralized as well? Does it still have a split committee that on median continues to look for one ease next year? I think the dispersion next year is certainly probably going to be messy.

There could be some hikes. There could be some cuts. But you know, kind of like the extent of the dispersion and the clarity of that signal, I think will ultimately matter for the dollar here.

And then obviously all of that kind of segues into what the press conference looks like. And, you know, I think we're all treating this is really kind of the most important thing for the dollar here. You know, ultimately a question of whether he lends leads into the idea that, you know, inflation is obviously meaningfully firmer than it was a few months ago, meaningfully above target that I think would be received well from the dollar side.

You know, more dovish and dollar bearish would be, you know, kind of looking at, you know, the forward looking prospects for inflation, disinflation rather via, you know, AI productivity, anything like that. Hard to say in advance exactly kind of like, you know, what kind of line he will toe. But I think there's a decent amount to play for on the dollar side out of that press conference.

And then the final thing I would say is that, you know, if he does kind of lean more into the firm inflation kind of story, you know, if the dots are looking for less easing rather than more, you know, I would kind of like come back to what you said about dollar fair value against rates. Certainly over the last month it has lagged kind of the outright and relative repricing that we've seen in real rates, for example. And you could perhaps attribute some of that to a risk premium around kind of the Fed and kind of, you know, market participants and wait and see mode to see how to treat the dollar after the June FOMC.

Stands to reason that perhaps if it is a less dovish, slightly more hawkish outcome on net that the dollar perhaps could start to retrace some of that misvaluation. So even if the short end doesn't itself reprice a whole lot, maybe the dollar gets a little bit of tailwind just on the valuation side of things. So I guess that skews me to lean into a slightly kind of like dollar positive risk profile in the next week.

But I think realistically, it's pretty reasonable to have a fairly square positioning going into this and just waiting to see what the new landscape looks like after next week. I agree with almost everything that you said there, Pat. The pressure, I think, is going to be a blockbuster when I'm seated here in Singapore, where clients I think nearly 100 percent of our client base is going to be up at 2 a.m., lights will be on in many parts of the city and suspected going to give the World Cup a run for its money as far as television ratings go.

But, yeah, look, I think the big question we are trying to answer really is here the degree of his orthodoxy. And that depends on sort of the incoming tone of the of the SEP as well as how he characterizes it as he laid out. Now, I suspect markets will be pushing to see how receptive he is, how open he is to the idea of opening up the right hand side of the U.S. rate distribution in a more material way.

Right. Because, I mean, I think that's the thing that will eventually drive rates and effects in a big way for at least two reasons, from an FX perspective, as you alluded to in some of your previous comments and writings, you know, once the Fed decides to hike, whenever that is, they tend to go big. So just looking at the last five hiking cycles, the smallest Fed hike was in ninety nine.

It was one seventy five basis points cumulatively. And despite the huge repricing we've seen in Fed expectations since the end of February when the war began, current terminal pricing in level terms is for thirty four basis points of hikes. Right.

So the orthodox Fed cycle is certainly not in the price. And in the spirit of preparing for a Fed tightening cycle again, whenever that is, we ran an analysis this week in our weekly publication trying to study what the dollar does in the anticipation of such moves. And the lesson there is that there is an appreciable four to five percent dollar rally between T minus six months to call it T plus one month around the first hike.

And this is kind of a very consistent pattern across the last four or five cycles. So if our economists are right that the first hike is not till September 27, then that dollar appreciation window isn't yet open and it doesn't open till March of next year. The market is right that it could get a hike as soon as tail end of this year.

Then that window is already open. I suspect we'll split the difference and the truth is somewhere in the middle, which means that at several points in the second half of the year, we'll have to grapple with this question more heavily. But I guess we leave the Fed there for now.

And maybe, Junior, turning to you, same question for you as the one that I posed to Pat. Perhaps the risks are not as dramatic around next week's BOJ MPM as they are for the Fed. But how do you see yen risks around next week's meeting?

Are you expecting the meeting to be leaning more hawkish or dovish? And then you can't really separate MOF intervention risks from BOJ rate decisions, can you? So, how do you read intervention risks in the aftermath of the meeting?

Thanks, Arundhat, for the question. Let me start with BOJ outlook. We expect BOJ to raise policy rate by 25 basis points to 1.0% next week.

But this has already had a fully pressed lean and it's unlikely to be a market mover. Instead, market attention is on Deputy Governor Uchida's press conference and the decision about QT strategy. As a conclusion, the hurdle for delivering a hawkish surprise at this time is extremely high.

And we see risks skewed towards an outcome being perceived as dovish accompanied by yen selling. As for Deputy Governor Uchida's press conference, to deliver a hawkish surprise, he needs to clearly signal an acceleration in the pace of rate hike or hikes to the level above the neutral rate. But I think it is unlikely that such a message will be delivered under the current condition.

On QT, the key focus will be the strategy from April next year and onward. We view it as reasonable to slow the current reduction pace from 200 billion yen per quarter to 100 billion yen. But media reports suggest the reduction could be halted from April next year.

If reductions are halted, as media said, the market would likely interpret this as dovish. From different perspectives, we believe that one reason why recent rise in expectation for BOJ rate hikes reflected in the 1-year, 1-year or 2-year, 1-year soft break has been accompanied by 100-yen depreciation, not by 100-yen appreciation, is the market view that under the Takaichi administration, BOJ's monetary policy could fall behind the curve. And under this environment, yen depreciation would accelerate at some point in the future and the BOJ will eventually force to raise rate aggressively to contain yen weakness.

To change this perception and enable rate hike expectation to lead to yen strength, BOJ communication alone may not be enough and the government may need to clearly change their stance toward BOJ monetary policy. Regarding MOF intervention, if the yen breaks above 160.70, the recent high marked just before MOF started intervention on April 30 and moved toward the cycle high at around 162, I think it is likely that we will see another round of yen buying intervention. The main question right now is how much the MOF can spend intervention for.

The MOF has disclosed that intervention carried out in April and May totaled about 12 trillion yen. This already exceeds 2022 amount and is approaching the 15 trillion yen seen in 2024. I think institutional constraints are not particularly binding and if Japan's authorities strongly want to do it, in theory, intervention much more than 15 trillion yen at the market in 2024, salitorium, volitorium, would be possible.

However, I believe authorities have the want to avoid materially reducing outstanding amount of VFX reserves, which would trigger market doubt about Japan's capability for additional intervention. This concern would effectively limit the room for intervention from here and if this view is correct, the cumulative intervention amount will likely be capped at around 20 to 25 trillion yen at most. This suggests that any future intervention would be capped at roughly the similar scale as what has already been conducted, about 12 trillion yen.

Given that the rent decline after the series of intervention conducted in April and early May was fully reversed within less than one month, the impact of any future intervention is also likely to be limited as well. When assessing the impact of BOJ-led hike and move intervention, it might be useful to compare with the episode in the summer of 2024. At the time, the rent declined by more than 20 yen, partly driven by the BOJ-led hike and move intervention.

However, there are several important differences between 2024 and now. This suggests that the probability of a similarly large yen appreciation this time is quite low. First, in 2024, both BOJ-led hike and move intervention were surprises, while this time they are already priced into a certain extent.

Second, in 2024, the U.S. dollar was broadly sold amid the rising expectation for Fed cuts following the weak U.S. job data, which contributed to decline to dollar gain as well. By contrast, since last Friday's strong job data, the market has begun to price in Fed BOJ-led hikes, and the U.S. dollar has been trading firmly. Finally, in the current environment, any large-scale unwinding of yen short position, like once seen in 2024, is unlikely.

In addition, the size of yen short position itself appeared to be smaller than that in 2024, with the latest IMF yen short position estimated at roughly 70% of the 2024 peak level. That's all from me. Thank you.

All right. Cool. Thanks for that, Junya.

Octavia, you have not one, not two, not three, but four central bank meetings next week. So I'll leave it to you to discuss what you expect from these, and particularly focusing on the ones where you think risks are more life for European FX. Plus, I guess you also have some political events on your neck of the woods, don't you?

So just throw it all at you, and pick up whichever parts of it feel more relevant for your currencies. Hey, Random. Thanks.

Across European FX, I'd say the Scandis are the most life story for next week among the central banks. So there, risks skew hawkish for Noki and dovish for Stocki, and overall it is likely it's underlined the monetary policy divergence between the two there. So Norges Bank, inflation remains sticky.

We had another core and wages overshoot this week. And markets are only pricing one hike for the year, which I'd say is at the lower end of a plausible range, considering their ex-anti-inflation pressures. So the asymmetry on guidance as well favors the Krone, and there's always the off chance they actually surprise with an early hike again.

And then on the Riksbank, our economists are expecting them to shift to a tightening bias, possibly signaling a hike this year, but rates markets are already pricing more than that. So even after the global rates rally, it's still around 30 basis points price for this year. And with inflation and growth running substantially below their forecasts, I'd say the bar for the Riksbank to actually out hawk markets is high.

And even on a hawkish surprise, Stocki might benefit near term, but I don't think it changes the big picture for it, because ultimately, globally, carry is low. Equity momentum versus the U.S. is against it, and the regional growth and fiscal dynamics remain unsupportive. And arguably, the Fed the same day has more potential as well to move Eurostocki than the Riksbank itself.

So we'll be watchful for that, considering its correlation with U.S. yields. And of course, there's the geopolitical developments for both of them, which will be tactical drivers on the week for both scanties. Turning to the S&B, I'd say risks likely skew net dovish, if anything.

I don't think they do much that would actually make you rethink bearish Swiss views, because markets are pricing around two thirds of a chance of a hike for this year, which I don't think the S&B will be suggesting next week. Instead, considering ex oil, inflation pressures don't seem to have changed, and we're still at the lower end of the inflation target band. They'd probably want to keep signaling flexibility, but patience, similarly to the last meeting, so as not to invite currency strength either.

And lastly, moving to sterling, James and Alan talked at length about the BOE and the maker field election on the podcast yesterday, so I'd refer you to that. But the bottom line is that for the BOE, there are modestly hawkish risks that underline sterling's carry, but it may also be overshadowed by headlines around the by-election going on. And ultimately there, we think it will be a while until you get a change in rhetoric on fiscal policy, and that's what will actually matter for sterling, rather than the vote count itself.

And in the meantime, until we get that shift, the market's sterling shorts can continue to be frustrated by, you know, carry, positioning and data resilience there. Very good, Octavia. So plenty of moving parts to look forward to.

I guess just to round up, central banks within DM, in my neck of the woods, we have a widely anticipated RBA hold next week, which is why I didn't bother to get Ben Jarman on this podcast on a Friday night in Sydney. I know there has been some local chatter out of Australia that some domestic banks have begun to raise the prospect of RBA rate cuts in the back half of next year, but A, that is next year, and B, we'd not be surprised if the thrust of Governor Bullock's pressure next week is going to be on the near-term challenge of inflation, second round effects from the large wage increases announced earlier in the year, and therefore implicitly kind of pushing back on the idea of any imminent rate cut. Shouldn't mean a huge deal for Aussie, though, where we think that the tone of risk markets, exactly the kind of stuff that he pointed out, Octavia, should drive sentiment around Aussie.

And, you know, fingers crossed, I think we've probably seen the worst of the risk market weakness that was in train for the last couple of weeks or so. All right, let's leave it there for this week, boys and girls. Thanks to all our listeners for tuning in.

This communication is provided for information purposes only. Please refer to JPMorgan Research Reports related to its content for more information, including important disclosures. 2026 JPMorgan Chase & Company, all rights reserved. This episode was recorded on June 12th, 2026.