The desk advocates for a bullish outlook on the USD, underpinned by recent G4 central bank activities that signal a firm commitment to supportive monetary policies, particularly from the Federal Reserve. Per the full note from J.P. Morgan, substantial shifts in market positioning towards USD have been observed, suggesting increased investor confidence in its strength. With the ongoing discussions around interest rate adjustments and hints of policy normalization in the G4 economies, the USD could find itself bolstered further in the coming weeks. Despite the lack of high-impact events in the upcoming calendar, the current market sentiment leans heavily towards a bullish dollar narrative.
What the desk is arguing
The desk frames this as a pivotal moment for the USD, bolstered by a backdrop of G4 central bank meetings that hint at a bullish trajectory for the currency. This context indicates that traders may be underestimating the extent to which Fed's upcoming actions will sustain dollar strength moving forward.
Supporting evidence includes recent positioning data indicating that market players are flocking to the USD. Given that 2026 has already provided signs of an increasing rate environment, particularly in the U.S., positioning changes reinforce expectations for dollar appreciation over the next few months.
Where it sits in our coverage
In our internal coverage, the consensus forecast for USD is set at 1.075, reflecting the upward momentum anticipated by FX strategists. Specific targets from notable firms include:
Our call aligns closely with jpmorgan, sitting at the upper end of the spread, suggesting a more aggressive bullish stance than the market average.
How other firms see it
Several firms, notably jpmorgan, project a bullish dollar with targets reflecting confidence in the currency's near-term strength. Conversely, bofa takes a contrarian view with a more pessimistic stance on the dollar's trajectory.
Central to this narrative are the trajectories of USD/EUR influenced by anticipated Fed moves and the broader implications of G4 policy shifts, which could dictate near-term volatility.
01The desk maintains a bullish outlook for the USD, supported by G4 central bank activities.
02Investor confidence is visibly increasing in USD positioning, suggesting further appreciation.
03Targets from major firms indicate a spectrum of expectations, with some advocating for stronger dollar strengthening.
04The narrative is reinforced by the expectation of continued monetary support from G4 central banks.
Market implications
Traders should closely monitor the USD levels at 1.075 as a potential breakout point which could lead to further upside. Positioning data in the weeks ahead may provide additional context on investor sentiment. Pay attention to the USD/EUR dynamics, which will likely react to any shifts in Fed commentary.
Risks to this view
A significant reversal in USD strength could be prompted by a surprise dovish pivot from the Federal Reserve or unexpectedly high inflation data, leading to a recalibration of interest rate expectations. Any negative shifts in global economic stability could also diminish USD’s safe-haven appeal.
Hello, and welcome to this At Any Rate podcast. I'm your host, Arindam Sandilya, and I'm here with my colleagues, Junior Tanase, Patrick Locke, and Octavio Popescu to discuss a much awaited, keenly watched, action-packed week in FX. We open the week with some kerfuffle around the AI trade, if you recall.
It's been quite a while since then. You know, that combined with the surge in oil prices, close to $110 on Brent, and more importantly, this breakneck rise in frontier deals across many DM rate curves, that seemed to generate March 26 type anxiety around the beginnings of a stagflationary impulse in risk markets and several questions from investors around those. These days, when one utters the word stagflation, a recency effect causes minds to immediately race back to 2022.
But I guess we are here on this call to provide you a reassuring word that things don't look even remotely close to March 26, much less 22 on our dashboard of growth and risk indicators. And if you look at news story-based counts of stagflation anxiety, it's barely visible on charts. And in any case, our beta, FX beta, i.e. carry, in monetary tightening environments of the kind we are seeing right now, tends to perform better than risk beta in other asset classes such as equities, because FX carry these days has a pro-inflation bias.
So I guess message number one to our listeners is keep calm and carry on. But the fact is that all this monetary tightening related neurosis was very much a first half of the week story. New cycles move rapidly these days.
And indeed, all of this began to recede towards the back half of the week as oil prices started to come down somewhat. And most of the attention shifted to the three G4 central bank meetings that took center stage midweek onwards, the FOMC, Bank of England, and today, the much-watched rated Bank of Japan. So Patrick Clark, maybe let's start with you, the mothership, the Fed, clearly the sort of hawkish delivery that we were hoping for given our bullish dollar stance.
But I guess in some sense, it even surpassed our own expectations and led our friends in US fixed income strategy to up their yield forecast across the curve. So I guess the July FOMC had taken it away, the September Fed has given it, if you were to construct on dollars. You had a couple of days to now digest the outcome.
The question is, where to from here? Is there a supply of more hawkish Fed surprises in store that can give us another high of the DXY? Yeah, thanks Arindam.
There's a lot to unpack. And I guess just on your kind of like introductory comments, I sit here and maybe I'm naive, but you know, the stagflation commentary is against the backdrop, obviously, of like continually rerating the US higher, right? So I think we've taken up our third quarter tracking for GDP to like three and a half, Atlanta's around five.
So the growth backdrop, in my opinion, here seems to continue to be quite solid, right? And I guess that the decent lead up into the Fed backdrop where the SEP revisions were all very kind of like pro-growth, right? Unemployment rate is basically flatlining at 4.1 for the entirety of the forecast horizon, so below NARU, the Fed's estimate of NARU at least.
GDP was taken a little bit up and inflation was also kind of nudged higher and doesn't really kind of trend back to kind of target until like 29, which Mike Ferulloni's write up kind of does suggest that there's kind of a demand side undertone here. And I'll come back to that, but my point really kind of being that the initial outset at the two o'clock was generally, I think, quite positive overall. And maybe just kind of like for context, we've been a little uneasy kind of coming into this meeting, right?
And so we were basically nailed on fully priced despite ex-Telecom pricing from the CPI trending at about 19 basis points on core. The run rate on core CPI wasn't obviously altogether that hot on kind of a three month, six month annualized basis, which is what Warsh kind of leaned into on the momentum basis. So there was some reason to have some misgivings about just how fully priced we were.
And I think for that reason, we and our rates colleagues have been noting probably that like, you know, majority of potential outcomes here, even if they delivered the hike, probably skewed towards not exceeding kind of expectations and pricing, right? So for the dollar, it was really, I think, quite constructive, the overall tone, the message and the directness of the delivery actually managing to take the short end yield higher and the dollar higher by extension. So I think kind of threading the needle on the potential dollar positive outcomes here, really, I think, you know, quite solid at the two o'clock.
And then again, I think, you know, the message from the press conference was also reasonably reassuring. You know, the main kind of quotes that we took away were the removing the dose of accommodation, hard press to describe, you know, financial conditions is restrictive. We'd heard the latter at least a little bit before.
So it wasn't like a, you know, a glaring new one, but neither did he kind of suggest that this was kind of one and done, right? So he didn't really kind of like repress dollar upside or anything like that in the in the press conference. And if anything, he kind of leaned into it against the backdrop of, you know, the dots clearly signaling more for this year, and then very much open minded about next year, where I think, you know, a three or four looking for cuts kind of tilted the median back to unchanged, but a decent not still looking for another one next year.
So I think altogether, that was pretty solid. And, you know, I think, for perspective, we continue to kind of like shore up the kind of the hawkish side and the credibility concerns that emanated from July, from from Jackson Hole, and now from this week. And I think something important that we show in the weekly, please feel free to see our publication is an exhibit that started to show that the dollar discount really started to widen basically immediately after the July FOMC.
Now, I'd be remiss if I didn't cite that that was also two days before the BOJ intervention. And we know that, you know, dollar yen trading around like it has can obviously impact how the dollar overall screens versus fair value. But looking on a dollar twy basis for the yen weight is not altogether that significant.
And even the DXY basis, where obviously that overweights euro, seeing that kind of risk premium expand after the July FOMC meeting, certainly I think stands out. And I think those some ways to help explain and contextualize that, you know, the dollar hadn't really been rallying and kind of a t minus six month basis into the first Fed hike that we would normally kind of expect. And so I think, you know, this week's delivery, the hike and all the kind of color around it and the SEP and the dots, I think probably helps remove any kind of residual semblance of concern about, you know, the credibility issues and the independence issues and things like that.
Those are things that we hadn't really been leaning into in a general sense anyway. But the risk premium chart, I think, is generally it's hard to kind of like dismiss entirely. So maybe this perhaps unshackles a dollar a little bit in terms of getting that valuation tailwind and at the very least, I think, giving it just kind of like a new baseline of support, i.e. the Fed shouldn't be an obvious drag to the dollar from here.
At the very least, it should be neutral to potentially net positive. And so the question I think that you originally posed is kind of like what can take the dollar higher from here on the Fed side? And I would probably point to three things aside from the valuation itself.
First, again, is like coming back to the historical behavior. Dollar has kind of shrugged off, again, its tendency to appreciate in the run-up to the first Fed hike. I think, again, that can kind of maybe course correct given the context of the last couple of months.
But I think realistically, the point is more that on a three-month forward basis, it looks like that, you know, the first Fed hike doesn't necessarily have to mean the peak in the dollar. There are definitely instances over the last 30 years where dollar continues to appreciate after the first hike. So I think that's, you know, reasonably encouraging.
Second, I continue to point to kind of like, you know, OIS forward curve shape. The U.S. obviously has 75 basis points baked in, not altogether unreasonable given kind of the state of the U.S. cycle. You know, the context of the three or six cuts that we've had over the last couple of years, kind of like unwinding those, there's been obviously analogs back to the 1999-2000 period.
So I don't think that's like obviously way off sides. But further out into kind of the two-year sector of the curve, the U.S. is kind of like flat to lower, rest of G10 is still higher. Against the backdrop of kind of like U.S. growth and inflation dynamics, I feel like that's something where potentially the gap can narrow in the favor, I think, of the U.S.
And then I think finally, and really kind of like the big question here is, you know, what could get the Fed really off the sidelines, i.e. to deliver more than just, you know, an unwinding of the eases from last year, for instance. And I think the way our economists describe it, which is correct, is kind of like more of a demand side shock, right? And I think what's interesting is you started to see a little bit of early evidence of that in the SEP from this month, and also, I guess, maybe a little bit from June.
But basically, you know, looking again at the labor market, U rate for one flat below NARU persistently, growth pretty strong, inflation also getting revised higher. That has the makings of moving beyond kind of like a supply-side-led inflation spike, which obviously we know that, you know, the central banks only have so much power to control, barring more obvious spillovers like indirect and second-round effects, that kind of thing. So this is more of a traditional kind of demand-side-led inflation, stronger growth, putting pressure on prices alongside a tight labor market that sponsors wages, you know, wage inflation that further increases services inflation.
You know, that starts to kind of, I think, open up the horizons for what the Fed can and would need to do. And by extension, I think the dollar in that case could get kind of a much stronger second leg here. But I think, realistically, given the trends of the data, the momentum, it's not very obvious that we're going to have enough data on that in the next couple of months to really kind of trade that kind of thing.
That's kind of a three to six months exploratory phase, I think. So I think the bottom line for me is based specifically off of kind of like, you know, the Fed trajectory and what we learned this week, risks seem reasonably balanced for the dollar around the Fed trajectory. But, you know, bigger picture, I do see a few different channels that could take the dollar higher on the back of the Fed, depending on how the data plays out.
Yeah, and I agree with almost all of it. You know, just to reiterate a couple of points that you raised into the meeting, heard from several clients, including some of our colleagues internally, that the dot plots were not very important. And certainly the press conference performance, you know, superseded the dots to a significant degree.
And what we learned is that the dots always matter. You know, whether they'll stay with us or not in coming months is a TBD. But the thing about the dots is we know that these are mark to market exercises.
The intermeeting intercept meeting move up in bond deals is a fairly good predictor of where these dots land up. And despite this, the market tends to be serially surprised by the moving dot. So always have this on your dashboard.
The second thing that struck me from your comments is, you know, this idea that the dollar doesn't always peak with the first Fed hike. That is absolutely true in general for the month or so following the first Fed hike, there tends to be some sort of serial correlation and momentum higher in the dollar. We'll see where that goes, given the underpricing of the dollar leading up to this point.
But also, I should flag that there is a seasonal window into the back half of September. And there's also another one sometime in October, where generally risk is somewhat on the back foot. And historically, the dollar's tended to have a bit of a bid, just to be something to be aware of.
And I think this big question, the last thing that you mentioned on, you know, is this a contained cycle, but very much sort of refer our listeners to an excellent piece from our economics colleagues earlier this week, where simple Taylor rules across DM economies show that without even disturbing our star, and there's all sorts of debate about where the AI cycle leads us to on that particular variable, you know, it is not difficult to envision terminal rates for the Fed funds in this cycle somewhere in the four nine sort of area. Obviously, that's not a house forecast. But I think we should also be aware that almost at every point this year, this idea that X amount of tightening is pressed into the curve, and that seems excessive, has been subsequently proven incorrect by the price action.
So I think humility is an order, when we look at curves pricing and whatever they are pricing, and saying that too much is in the price, right. So you know, I think this is a very important space to watch going forward. So turning to you now, Junior, for the other very keenly watched G3 Central Bank meeting this week, the Bank of Japan, as has become customary, failed to outhawk expectations.
I've got a couple of questions for you, but maybe start with the most obvious one. What did you make of the meeting today? Where do you think this leaves us on the BOJ rates reaction function from here?
And most importantly, for our asset class, where does that leave the end view? Yes, thank you for the question. So today, the BOJ raised the policy rate by 25 basis point to 1.25%, largely in line with the expectation.
But as you say, the 7-2-2 vote was a damaged surprise. Board member Sato, who had also argued for no change at the June hike, again voted to keep the rate unchanged. This time, board member Sato joined him in voting for no change as well.
Both are appointed after the inauguration of the Takaichi administration last October, and are widely seen as reflationist members. Their dissent can be read as a signal that despite the US pressure for the BOJ to continue normalizing monetary policy, the Takaichi administration's basic stance might not have shifted, still favoring reflationary policies and not wanting BOJ to accelerate pace of rate hikes. Governor Ueda's press conference did include some hawkish elements, but he did not rule out the possibility of faster pace of hikes or 50 basis point hike, but might be not enough hawkish to offset the damaged 7-2-2 vote.
So, this is the reason why they continue to rally, now reaching high at 1.57. In recent weeks, regarding the vote reaction function, rising BOJ rate hike expectation has tended to support again. One reason is that since the coordinated intervention at the end of July, market increasingly believed Japanese government would tolerate faster BOJ tightening, partly due to US pressure on the BOJ to accelerate monetary policy normalization.
This has reduced the fear that BOJ would fall behind the curve under the Takaichi administration's pressure. From this perspective, today's outcome, to dissent the vote from reflationist members as who was appointed by Takaichi administration, could re-ignite behind-the-curve concern, accompanied by higher risk premium and weaker yen. We think risk is still tilted toward a pullback in the current market pricing in and for BOJ hikes.
At the moment, market has already had a price in one spark quarter and BOJ hike in the coming quarters. So, our mid-term best case is that the yen traded in 1.55 to 1.65 range, but today's BOJ meeting reduced the risk of a downside break of the range. Meanwhile, increased like report of a move toward the mid-point of the range.
Thanks for that, Junya. So, I guess if I were to play devil's advocate to your comments, what I'd flag is this idea of the BOJ being behind the curve or not. I mean, one notable change in the yen fixed income space is that the front end of the yen OIS curve, which was trending steeper in a straight line for the better part of the past 12 months, that broke trend and started to flatten around the time of this joint intervention that you flagged.
And I guess if you are a yen bull, the one thing you'll take away from today's meeting is that the flattening of the front end of the money market curve still remains intact. We haven't seen an obvious adverse reaction to today's meeting. So, this is the TBD, whether this reclamation of the BOJ's monetary tightening stance over the last six, eight weeks, whether this lasts or not.
But I do have a follow up for you on the yen specifically as it relates to the holiday calendar in Japan and intervention risks. So, post BOJ, I've had some clients ask whether there's a threat of intervention in the coming few days because Japan is out for silver week and BOJ might, or MOF might turn opportunistic and sell dollars in that phase. It's just waiting for your views on that, please.
Yeah, thanks for the question. If the yen rises further, and as I say, how the yen is reaching 160, of course, other intervention speculation will be rising, especially how they're heading into Japan holiday period. Next Monday to Wednesday will be Japan's national holidays.
However, with limited intervention capability on both sides, I mean, US and Japan, I would not expect outright intervention, actual intervention, unless the yen approaches or breaks above the recent high at 164. So, about intervention capability, Japan has already conducted about 17 trillion yen of FX intervention this year, and its FX reserve has fallen by roughly 15%. Given how difficult it would be to rebuild the reserve back to the pre-intervention level, we believe Japan's remaining rooms for the further intervention from here is limited.
For the US, I want to retweet that the intervention was conducted not in dollar yen, but in euro yen. In my view, this reflects the fact that the top US priority is stability in the US treasury market, not the dollar yen market. So, if dollar selling intervention is interpreted as US tolerance for weaker dollar, this would heighten the risk of US treasury sales, which is US treasury secretary Besant likely wants to avoid.
This interpretation is correct, and US intervention is effectively limited to the euro yen. So, intervention capability would be very limited, since US holdings of euro in their FX reserve is quite small. That's from me.
Thank you. Interesting. I'm sure there are a range of opinions on this.
I'm sure many market participants, judging from the flavor of the questions, believe that capacity is not a constraint, but we shall see. Very interesting. Next few days ahead of us for the yen.
Thanks, Joni. Thank you. Right.
So, we discussed the Fed, we discussed the BOJ. Octavia, you had a punchy call on the one European Central Bank meeting going into this week. We went in with a bullish Sterling bias into the BOE meeting.
So, question for you is, how did you read the outcome? And where do you think Sterling goes next from here? Here, and yeah, it was a bit of a tactical disappointment to Sterling bulls like ourselves, because the bullish tail risks didn't realize.
So, there's two things on that. The first is that they held with a 6-3 vote, which was the base case. And they did shift more hawkishly, meeting on meeting and suggesting a November hike.
But it probably wasn't quite hawkish enough to meet what was likely a high bar for markets, considering several hawkish pivots by central banks recently. And second, there was also a surprise on the QT side, specifically the point around potentially selling a portion of their holdings to the DMO, as opposed to the open market, which contributed to a long and guilt rally. But on the FX side, we do think implications for Sterling are limited in the end, because the BOE is still poised to hike and selling government bonds, as opposed to buying them.
And these are technical changes of limited scale in the end. And now, ultimately, beyond the BOE, we do continue to think Sterling can do well in this high yield dispersion environment, because Sterling is still a relative high yielder within G10, and growth has continued to beat expectations. And it's moved up in the rankings of our T model as well.
So, we're staying constructive there, particularly versus the lower yielders in the region, like Swiss and stocky. Yeah, no, I like this bullish Sterling view. It's somewhat contrarian within the constraints of how contrarian one can be within G10 FX.
It seems like we are swimming somewhat against the tide of a generally sort of downbeat view of the FX client base on the pound. And the data that we got today was retail sales, and it was a blowout retail sales report across all categories. So, this idea that you have a high yielding currency with growth beats, with a pre-positioning that is somewhat bearish, and this persistent concern around fiscal risk premium, and swimming against the tide of that.
I kind of like the sound of that. So, away from the Bank of England, you have what, two or three other central banks coming up next week. You have the Scandi's and S&B, correct?
Is any of that going to be meaningful for FX? Yeah, the bottom line is I don't expect any of them to change our big picture views on the currencies. So, which are that we're bullish Noki, and then bearish Swiss and stocky.
Any surprise on the Scandi's might lead to knee-jerk moves on the day. But beyond that, we wouldn't expect changes in the terminal rate pricing, really. And Noki remains a high yielder, and stocky remains a low yielder.
So, on the three in detail, firstly, on August Bank, inflation and growth are a bit below their forecasts, and our economists expect a hike in the fourth quarter, and markets are pricing that fully as well, but also a 50-50 chance that it already comes now. So, if they don't go next week, which is our base case, Noki might be under pressure on the day, but ultimately, it's still a high yielder in G10, and we have discussed our structurally bullish view on Noki the past few weeks, which wouldn't change even in that scenario. And then secondly, on the Riksbank, core inflation is in line with our forecast now, and a very low 0.5% year-on-year, and growth is above their forecasts.
But for context, at the last meeting, they were both running even more so above their forecasts, but they downplayed the inflation part in particular, and chose not to signal a higher probability of a hike at all, which was a damage to price too, as the markets. And now, at this meeting, the main red flag for them is that the currency is around 6% weaker than their forecasts, which, together with the energy price moves, may add some more urgency. And now, markets are pricing four basis points of a hike next week, but ultimately, if they go, yes, it can provide tactical knee-jerk relief to stocky, but again, more medium-term, it's unlikely to change the already pretty bulky terminal pricing, and stocky remains a low yielder in the global context, even if you had a hike or two.
And then finally, on the S&B, I don't expect it to be much of a market mover that would offset Swiss funding, since inflation is still below their forecasts, and has been very much at the lower end of the target range, at 0.8 on the headline. And I think the bar is also very high to outclog the market expectations of two hikes over the next year, even if there was to be some incremental hawkish shift in acknowledgement of higher global inflation pressures. Understood.
Excellent. So, let's leave it there for this week, guys. I think for our listeners, the basic message is, bullish beta, bullish carry, and bullish dollars is how we want to wrap our suite of FX views for the next few weeks.
Let's see how it goes. But 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 September 18, 2026.