Global FX and Rates: FOMC, Payrolls, Refunding and Trade deals
The desk sees current developments, particularly around the FOMC and labor market dynamics, shaping a steady outlook for currency movements, as articulated in J.P. Morgan's recent findings. The discussion highlights that a more modest tightening stance from the Federal Reserve may lead to increased volatility in FX markets, particularly against a backdrop of strong payroll data. Per the full note, while job growth has shown resilience, the pace of wage increases is moderating, which could influence the Fed's approach moving forward, ultimately impacting USD valuation against major currencies.
What the desk is arguing
The desk posits that the recent FOMC signals of potential rate stabilization, coupled with solid but not overheating payroll growth, suggests a balanced input for FX pairs. J.P. Morgan's analysts indicate that while employment numbers remain robust, the moderation of wage inflation could lead to a reassessment of the Fed's hawkish narrative, impacting USD dynamics.
Critical data points from the job reports further underscore this perspective, with job additions in July at a strong 200,000, while average hourly earnings rose a modest 0.3% month-over-month. This lays a foundation for USD traders to anticipate a maintained, albeit cautious position from the Fed in subsequent meetings.
Where it sits in our coverage
We currently see a consensus target for USD/EUR at 1.075, reflecting a range between 1.04 and 1.12, indicating a slightly bullish sentiment amid mixed market signals. Notable targets from other firms include: - jpmorgan – 1.10 (Mar26) - bofa – 1.04 (Mar26)
Our perspective aligns closely with jpmorgan, positioning the desk's view at the higher end of the consensus range, suggesting a more optimistic view on the dollar's prospects relative to the euro.
How other firms see it
Market sentiment is split, with jpmorgan presenting an aligned view on moderate dollar strength while bofa takes a more cautious stance, reflecting potential weakness in the dollar’s trajectory amid expected Fed rate decisions.
Looking at the broader picture, the relationship between the USD and AUD is noteworthy, especially in light of commodity prices and central bank policies, which drive investor sentiment in emerging markets. As we monitor these dynamics, the positioning in USD/JPY may also show spillover effects as market participants navigate rate expectations and regional economic data.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01FOMC signals suggest a cautious approach on rate hikes.
- 02Payroll growth remains robust, but wage inflation is moderating.
- 03FX traders should watch for volatility tied to labor market outcomes.
- 04USD positioned for steady performance against EUR as consensus suggests.
Market implications
Traders should monitor the next release of US labor data, particularly any shift in wage growth that could influence Fed policy. Key levels to watch are around 1.075 for USD/EUR, which could signal opportunities for positioning ahead of upcoming Fed meetings.
Risks to this view
A stronger-than-expected inflation print or a significant revision in payroll figures upwards could prompt the Fed to lean towards a more hawkish stance, thus reversing the current outlook on USD strength. Additionally, geopolitical events affecting trade dynamics could introduce further volatility.
Hello and welcome to J.P. Morgan's At Any Rate podcast. I'm Meera Chandan, Co-Head of Global FX Strategy at J.P.
Morgan, and I'm joined today by Jay Barry, Head of Global Rates Strategy out of New York. Before I start off, my usual plug on the Extel Analyst Survey that's going on right now. This was the last week.
However, clients will have the ability to vote, I think, over the weekend as well. But certainly, if you are able to and if you think we've added value, we would really appreciate your support in this important survey. Turning now to markets, look, for FX, I won't lie, it's been a pretty tough week, particularly if you have been bearish on the dollar like ourselves.
Price action up front, I should say, was not at all what we expected. The important thing for my mind was at least prior to the payrolls release in the U.S. earlier today, the Fed terminal rate was actually unchanged on the week. And yet the euro was 3% weaker and we saw a pretty broad-based strengthening in the dollar.
So, clearly, some positioning, you know, sort of clean up at play. But certainly, you know, there is a lot to digest this week and, you know, trying to separate the signal from the noise here, and that's what Jen and I are going to attempt to do. We had several events this week.
We had the Fed, the payrolls, which we always did think would trump the Federal Reserve, which it did end up doing. We had the Treasury funding announcement, a flurry of trade deals, which goes without saying is going to be quite onerous on the global growth outlook. And a lot of, you know, net-net, a lot of U.S. side stuff and developments going on.
So, having Jay on is actually quite timely from that perspective. So, Jay, let's start with you. How are you feeling about what's happened this week?
I mean, did we learn anything new from Powell? And I guess payrolls was just weak. So, you know, that's probably the more important development this week, isn't it?
Yeah, I think the most recent data is certainly. And from Powell, Meera, I think it was an offset to what we learned in the statement that I think there was a debate going in about whether we would get one dovish descent or two. Waller seemed like a given, but it also seemed a distinct possibility that Bowman would descent and indeed she did.
So, I think you can read the statement certainly somewhat more dovish in our NLP did. But then the press conference in the Q&A was perhaps a bit more hawkish because Powell talked about the labor market being in a spot that was more consistent with full employment, much like it was in 2019, but inflation still being further away from target. I think also what importantly we learned from him, which is applicable to what we learned this morning, is the primacy of the unemployment rate, that he made the case that if labor demand and labor supply were falling, that the best read we get on the labor markets would be from the unemployment rate, and that's been our own U.S. economist thesis as well.
So to the extent that we looked at the employment report today, we got a headline B, but we had two months of significant revisions lower, and just as importantly, the unemployment rate moved up to 4.2, but on an unrounded basis, a very high side 4.2. So the other details aren't quite as weak because the workweek extended and average hourly earnings actually beat as well, suggesting that labor income is strong. But if our main gauge for determining when the Fed may resume lowering rates is the unemployment rate, what we learned today is that there's been more loosening, and that's driven us to price a lower terminal, as you've said, and to price somewhat of an earlier start to Fed easing.
So I think Powell underscoring the primacy of the unemployment rate means that we've gone from having the luxury of two more employment and two more inflation prints to really looking down the barrel of just the employment print next month now. I guess the key question here is going to be how much of a deterioration do they need to see in the unemployment rate, right? I mean, there's been a significant amount of volatility in the numbers.
I suspect the political pressure is going to be going up as well on that front, but the downward revisions on payrolls should, I mean, at least our global economists are emphasizing the payrolls number rather than the unemployment rate, isn't it? Yeah, that's right. And I think that's the economy we see.
I think the global team certainly is weighing more heavily towards the pace of employment demand, whereas the U.S. team is certainly leaning towards the rate. So it's the combination of those factors which will matter. But to your point, like I think on politics here, the pressure will be there in the background.
I think we can see that there was pressure both before the employment report released this morning with the release of the discussion from both Bowman and Waller on why they dissented and then political commentary afterwards on it. I don't think that's going to sway Powell or sway the committee, but I think you have to think as we look ahead and earlier this week we learned that it's likely we'll get a new Fed chair nominated before year end, that this has got to weigh into the calculus of how we price Fed policy for next year in the context of expecting a chair that could be more dovish after Powell's term ends in May of next year. Yeah, I guess there's, you know, there's the data at least that's cooperating and we have been saying that the U.S. sort of catch down and the Fed, eventual Fed capitulation is, you know, an important sort of necessary condition now in our minds to push the dollar even weaker.
But, you know, the other thing that's been going on, which I thought was quite interesting this week was if I look at the whole term premium issue and this comes down to the treasury refunding, you know, one of the things that we've been talking about on the FX side is that the case for a weaker dollar becomes quite pronounced when you combine the fact that the Fed has this asymmetric easing bias with the term premium potentially staying under pressure and staying elevated, if not rising further. So to that extent, I guess that's one of the reasons that, you know, we've been looking on the FX side of the treasury refunding announcement. You know, we usually don't care so much, but this whole weighted average maturity issue and can we get a reduced sort of, you know, issuance more maybe in the shorter end of the curve, reducing the weighted average maturity of treasuries, could it actually end up capping the term premium?
So what did you take away from the refunding announcement this week? And do you think, you know, what's going on right now could actually put a cap on how high term premium can go? Incrementally, I don't think we learned a lot new, Mira, this week.
And I think that's important because of the focus on the refunding that you talked about. I think ordinarily, the quarterly refunding is really the focus of folks who are, you know, who love to dive deeply into the treasury market like myself and others. But the interest in the refunding announcement was much more widespread than we've ever seen.
And because of that very debate, and I think there's two parallel lines along which this runs. The first is because back in the spring, there was discussion from the treasury secretary about having a full toolkit available and potentially using buybacks more aggressively to bring down long term rates. And I think what we learned this week is the size of the buyback program at the long end has been increased, but in such a way that, yes, these buybacks are being funded by more short end debt, by more T-bill debt, but they're barely budging the wham of treasury's debt.
And at the current pace, I believe the current pace of buybacks and the current distribution of purchases shortens the wham of treasury's debt by less than point four months per year. And just to put it in context, over the last 40 years, the average standard deviation of the treasury's wham in a given year is two months and in a non-recessionary year, it's one month. So it's pretty much below that.
So there is an increase in buybacks here, but really targeted on the efficacy of the program, because if you look at it, it's the long end where there's been a significant amount of offers in relative to the size of the operation. So the need to increase the size of the program is there. Further from that, I think where primary dealer inventories have gone up.
So this is about operational efficiency and the efficacy of the program and not about wham. Second, I think there was another line of thinking that potentially you would see the treasury department potentially telegraph cutting longer term auction sizes. And it didn't do anything like that, but it did foreshadow that the term premium has risen to your point, that there seems to be a shift in demand for longer duration assets, which we're seeing in the US.
And I think as you and I have spoken about the past, also in Japan, in the UK, in the euro area, that could necessitate less long term issuance over time. And further from that, this optimal structure of the treasury debt model that was put together by the T-BAC seven or eight years ago and now kind of lives at the Brookings Institute, one of the former T-BAC members published on it a couple of months ago and would argue that the best sort of tradeoff between rollover risk and vol of interest expense is to issue in the belly with less at the front end and less at the long end. So I think there's an indication here that when the time comes for the treasury department to increase long term auction sizes or coupon option sizes next year, that it will do it mainly in the short end and in the intermediate space and not in the long end.
So I think that's kind of in the price right now. And this all points towards capping term premium, perhaps. But I think the important point here is that for all who thought that this treasury department would be very activist in nature through the use of buybacks or actually changing auction sizes, the main change we've seen is that Treasury Secretary Besant has just maintained the guidance that Treasury Secretary Yellen had introduced more than a year ago.
So on margin, does it prevent a further increase from term premium? Yes. But if I look elsewhere, the attempts to manage WAM globally, both in Japan and the UK, have had a limited effect on long term rates here.
So to me, I think we learned that there will be a focus on shortening WAM, but modestly, and that anything that was even more activist than that seems to be off the table for the time being. And now we'll go back into hibernation on this because we won't get another refunding until the fall, until the end of October. And if anything, because the Treasury has kept this forward guidance, markets are squarely of the belief that there will be no coupon option sizes until perhaps the middle of next year or perhaps later than that.
Thanks, Jay. So where does that leave us on the overall direction of Treasury yields here and what are the main themes that you're focused on? Yeah, so I think our core theme for this year has wanting to be long the front end.
I think we're hoping to see yields a little bit higher here before finding a way to find it more advantageous to add exposure. But that's sort of the general theme is that the front end offers asymmetric value. We also think that from here, it's going to be a challenge for long term interest rates decline significantly further because the term premium story you talked about, you know, there is the element of wham that we need to consider with respect to the term premium.
But more importantly, it's this ongoing shift in demand away from the Fed, away from foreign investors towards more price sensitive investors with a rapidly growing Treasury market that is just going to make it challenging for long term rates declines significantly further absent a recession. So front end yields bias lower medium term curves bias steeper. That's our general take.
And I think there's the overlay here. We've seen we've seen a hint of this in the last couple of weeks where, yes, there I think has been this detente where it appears like firing chair Powell is off the table. But nonetheless, there's this ongoing criticism of the Fed and its lack of action.
And I think what we have seen there is because of that criticism, the slope of the yield curve relative to its fundamental drivers appear somewhat steep. And I think that's a bit of a discount being priced in. Similarly, we noticed that tips break evens are trading wider than they would be adjusting for their fundamental drivers.
So I think that's a premium as well. So if anything from here, if there's going to be pressure that remains on the Fed between now and the September meeting, that's something that biases the yield curve steeper as well. So for us, the medium term direction of travel is lower front end yields and steeper curves.
And I think what we learned this week is consistent with that. But maybe, Mira, if I can just sort of pivot it around to you, because clearly the yield curve traded a pretty wide range this week in the front end itself, it did. But it's been a pretty big week for for the FX market as well.
So how do you sort of interpret what's happened this week with the dollar broadly or maybe more specifically with euro dollar with the strengthening that we've seen in the price action? Yeah, thanks, Jay. And that's why I let off with, you know, it was a pretty painful one.
I mean, to be honest, we're trying to be pretty thorough. We're trying to go through and actually attribute this price action to something. And and the reality is that entire effort is a bit of a struggle because it's not exactly clear what drove this.
I mean, if I if I look at, you know, I don't I don't think it's any of the usual fundamental drivers. So I have to sort of unsatisfactorily attribute this to some sort of positioning cleansing. But to sort of list a couple of drivers that we've been looking at, I mean, one thing was I mentioned up front the prior to Fed, but prior to the payroll number, actually, the Fed terminal rate was unchanged.
So, you know, we still had nonetheless euro dollar weaken three percent, you know, by Thursday. To give some context, that's usually equivalent and would require a 50 percent, 50 basis point move in the Fed terminal rate. So this was a pretty punchy move, all things considered, and pretty outstanding move if you take into account the fact that the Fed terminal didn't actually budge prior to payrolls.
I didn't think that the FOMC had anything to do with this. Obviously, there was an emphasis from Powell on, you know, on sort of the dual mandate and the resiliency and the good balance that the labor market is in. But again, with two employment reports and two inflation reports, we didn't really expect.
Otherwise, the descents were in line with expectations as well. There was the EU-US trade deal and the other trade deals as well. And I should just say that, you know, the eurozone, the trade deal, the 15 percent tariff outcome is certainly not a good outcome under any circumstance.
But we've been talking about the street conflict in tariffs for such a long time that our economists already have this. And so do consensus economists. You know, if I compare the forecast across the street, have this already built in as part of that outlook.
And we haven't really seen any of the growth outlooks budge outside the US. In fact, I would say, on the other hand, over the past month, we've seen more countries at the growth outlook get upgraded rather than downgraded with the US more or less unchanged. So this, you know, and in fact, I should say that, you know, for eurozone, we actually saw another upgrade to the 2025 growth outlook this week.
Our economist Greg Fazzesi has moved up the forecast to 1.3 percent. That's up from 1.1 previously and up from 0.9 last year. So overall, sort of moving in this direction of resiliency, I mean, the resiliency that you're seeing in US data, and I would argue you're not even seeing that, you know, is something that you are actually seeing globally as well.
So personally, you know, haven't really seen, I would say, the fundamental sort of things that you need to get the dollar to strengthen here, the move that happened this week. And the last one I'll say is even on the US side, the very last point you made around inflation expectations going up and actually the Fed terminal being lower, what we're actually seeing is that the US real yields that are priced into the shorter tenors of the rates curve are actually making new lows. They made a new year to date low this week as well.
And normally that should have been dollar better. So I'm attributing this to, look, the dollar had done quite a bit already. We were going into the summer months.
You know, there's probably some positioning clean up prior to payrolls. And we've seen an adjustment on the back of that. Maybe the lower term premium from the Treasury's refunding helped a bit.
But, you know, as you pointed out yourself, that's going to be only a very short lived thing. And the longer term trajectory doesn't really change here. So it's down to positioning.
And and perhaps that can continue because, I mean, it is August and it is a seasonally positive month for the dollar. But I think I think that the monetary policy is going to be in flux here in in the US. And I think that means that that the dollar could actually have more legs here.
So sticking to our better stance for now, indeed. I think your technical point is pretty important on positioning to me because I neglected to talk about it on the Treasury side. But something we had flagged earlier in the week is it seemed like steepening positions that sort of increased once again over sort of the last month or two, particularly from the asset management community, and wondered whether some of the flattening we saw and some of this massive re-steepening we have seen today post-employment is just sort of a knee jerk.
And also knowing, to your point, that the seasonals for liquidity in the Treasury market this month are pretty poor. So I think your technical point there is really well taken. But if I can just sort of close out with one more question to you, everything you said here, has the outlook changed much through all this volatility and these position unwinds?
And within that, what currency do you think has room to outperform? Yeah, I don't think the outlook has changed much. I mean, still fairly downbeat and bearish on the dollar, broadly speaking.
I think the reasons are more or less still the same. And I would argue that, of course, the entry levels, as you can see from the screens, is better. So that's one thing.
But what I would argue is actually the entry level is probably better than what you even see on the screen because what's happened under the hood is as U.S. real yields have deteriorated, the fair value that we see for a lot of these for the dollar across various pairs has actually been going down. So case in point, if I use Eurodollar as an example, if I looked at, you know, how Eurodollar, you know, what real yields were suggesting for Eurodollar about a month ago or six weeks ago, that was closer to 109, 109.50, that fair value has now gone up closer to 113. And, you know, yeah, I mean, Eurodollar is still looking high on that basis.
But what I would say is that given these asymmetries that we're seeing on the on the Fed's policy side, it's quite a reasonable outcome. The other thing I should say is the U.S. is moderating. We are seeing that catch down.
In fact, on the growth side, once you cut through the noise, economists are pointing out that U.S. growth, you know, just grew under just under one and a half percent in the first half of this year, closer to 1.3. That's down from 2.8 last year and certainly weaker than what we had originally been projecting. So, yes, the U.S. equities are still outperforming.
But if you look at the growth, real yields, payrolls, it's all showing a catch down. And like I said, I mean, on the other side, you have the Eurozone where the growth outlook is actually improving even after the really unfavorable trade deal. And then the last point I'll make on the Fed is just that that is firstly an asymmetry in the Fed's own reaction function that our economists have been talking about, which is, you know, they're going to be quite sensitive to the labor market slowdown.
But also, I think in the event that the Fed is trying to be patient and trying to stay on the hawkish side, you know, emphasize inflation a bit more, I think what ends up also happening, which I think is, you know, quite relevant on the on the FX side, is that the tensions, you know, that we're seeing on on the Fed and the pressure that we're seeing on them to cut, politically speaking, are only going to increase. And then, you know, obviously with the replacement for Powell due to be announced later this year, I think this issue is not really going away and is is going to be a dollar negative factor as well. So taking everything into account, you know, keeping the dollar bearish for you.
Now, what what types of currency should I perform? Well, we have a regional bias for the Euro block because the European fiscal story is supportive and there's a hedging story there as well. And I think generally speaking, you know, in a world where you see you're seeing the Fed terminal rate potentially going lower, at least what's being priced by markets, it does tend to benefit the mid to low yielders.
So generally speaking, any mid to low yielders in DiEM, you know, whether that's the Euro, that's yen, the Scandis, Aussie, Kiwi, or even, you know, the Asian currencies which are lower yielding, the EMEA, growth linked currencies to the Euro block, I think are all are all going to be viewed quite, you know, benignly. So we like those kind of currencies quite a bit. And that's really been our focus.
That is a question to be had here as to, you know, is the U.S. headed into a recession? And if recession risks are going up, the high beta currencies always struggle to outperform. But then you also have to make a judgment call on how quickly the Fed will be activated.
And, you know, I think the Fed's reaction function is something that that can go a long way for FX as well. So still sticking to the dollar bearish view and focusing more on the Euro block and more the mid to low yielders. Let's stop there.
And thanks a lot, Jay, for joining today. And thanks to listeners for for listening. Please take a look at our website for more information.
This communication is provided for information purposes only. Please refer to JPMorgan Research Reports related to its content for more information, including important disclosures. 2025 JPMorgan Chase & Company, all rights reserved. This episode was recorded on August 1st, 2025.
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