Global FX: Can USD weakness continue, Russia/Ukraine Scenarios and what’s next for GBP
The desk sees potential for continued USD weakness as geopolitical developments remain uncertain, particularly surrounding the Russia-Ukraine war. Per the full note from J.P. Morgan, various scenarios surrounding a ceasefire could introduce volatility in both developed (DM) and emerging market (EM) currencies, thereby affecting USD dynamics. Additionally, GBP's outlook appears mixed, with localized pressures from the Bank of England and ongoing global inflation concerns. With no high-impact events in the next month, traders should position for this uncertainty and potential adjustments in central bank policies.
What the desk is arguing
The desk underscores that the recent consolidation in USD may be indicative of a broader trend toward weakness, contingent on evolving geopolitical risks. This assessment aligns with insights from J.P. Morgan, pointing to the Russia-Ukraine scenario as a catalyst for trading opportunities.
Recent trends also suggest that DM currencies could benefit from any positive ceasefire developments in Ukraine, potentially allowing for a further divergence in monetary policy between the Fed and central banks in Europe. The focus on GBP highlights the need to watch for further signals from the Bank of England's policy stance.
Where it sits in our coverage
- J.P. Morgan: 1.10 (Mar26)
- Bank of America: 1.04 (Mar26)
This view aligns with jpmorgan, which remains optimistic about GBP amid stabilizing economic conditions, while diverging from bofa, which predicts a more bearish outlook on the currency.
How other firms see it
J.P. Morgan and other aligning firms foresee a rebound for GBP as the central bank potentially shifts towards a more hawkish tone. Conversely, firms like bofa are skeptical about GBP's strength, citing lingering inflation concerns.
Investors should also monitor the USD/JPY relationship as it may mirror potential Federal Reserve policy shifts, particularly in relation to interest rate adjustments.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01USD may continue to weaken amid geopolitical uncertainty.
- 02GBP outlook remains mixed due to internal and external pressures.
- 03Watch for ceasefire developments for potential market volatility.
- 04Positioning in USD pairs could be adjusted based on central bank signals.
Market implications
Traders should be vigilant at key resistance levels around 1.08 in the GBP/USD as any positive geopolitical developments may trigger a breakout. Be prepared for shifts in positioning as the market reacts.
Risks to this view
A stabilization or escalated conflict in Ukraine could lead to a stronger USD, reversing current trends. Additionally, a surprising shift in BoE policy towards more aggressive rate hikes could bolster GBP unexpectedly.
Hello and welcome to J.P. Morgan's At Any Date podcast. I'm Meera Chandan, co-head of FX Strategy at J.P.
Morgan, and I'm joined today by two of my colleagues, Anetka Kristevova, who's head of EMEA and LATAM local markets strategy in EM, and also James Maligan, senior FX strategist from London. We'll be talking about two topics today. Firstly, what the expectations are, and perhaps more importantly, what the various scenarios for the Putin-Trump talks could be, and what that could mean for FX, particularly in the region.
And then, I think in a bit more detail, on some more bottom-up drivers for FX in the region, both on the DM and the EM side. But, you know, taking a step back, maybe on the broad dollar, a bit of a monologue from me, but, you know, Anetka, James, feel free to interrupt if you feel like you object to something. But on the broad dollar, we have been bearish on the dollar with the regional preference for the Euro block.
We have stuck to that view, despite the recent volatility, and, you know, with all of that, I would say the dollar index has been consolidating for the last two months, so it's not been very gratifying. So, I've been personally spending a lot of time in these summer months thinking about three things in particular for the dollar. First, what are the conditions for dollar bearishness?
Are they still intact? Second, what could be the catalyst for the next leg of dollar weakness? And third, what is the size of dollar weakness that each of these catalysts could deliver?
And I would say on the first, like, what are the conditions for dollar bearishness? I think all of those are still intact. That's the short answer.
I think on the U.S. side, you've got U.S. real yields, which keep heading lower. We've had a new year-to-date low once again last week. U.S. growth is still continuing to catch down relative to the rest of the world.
You've got the asymmetric reaction function from the Fed. And then, of course, you've got market concerns and Fed independence and what the longer-term prospects on that are. So that's all very much in play on the U.S. side.
And outside the U.S., you know, the outlook for softer growth is still there. But the reality is that if you look at the direction of our growth forecast, there is an indices from our economists that outlook is actually improving relative to our forecast, which just tell you that some of these forecasts have become quite downbeat. It's quite an interesting outcome.
And of course, we'll get a repeat for that from the PMIs next week. But there is a second catalyst outside of the U.S., and that's what we'll be talking about today as well, which is the Russia-Ukraine ceasefire. But the bottom line here is if you do take a step back, you've got a situation where the Fed is easing.
It's got an asymmetric reaction function. You've got longer-term Fed independence and policy concerns. You've got U.S. moderating.
That's really still the starting point for us and something that we're still fixating on. I think the more problematic issue is really around the second and third questions, which is what are the catalysts for the next dollar weakness and what is the size of the dollar weakness this could deliver. I think the catalyst, if you are looking for high-intensity sort of part of dollar weakness, I think we need movement on the U.S. side of the equation, whether that's Fed capitulation to the dovish side.
I think we'll get maybe some insight into this on the Jackson Hole Symposium next week. But at the end of the day, we're still going to be beholden to that next payroll number. So don't really expect a lot there.
Or you need some more intensified concerns on the Fed independence story. You could get another high-intensity move from this Russia-Ukraine resolution, but I should say that's a pretty high bar. We'll talk about that in a minute.
And if we don't get either of these high-intensity outcomes, I think you're going to end up very much in data-watching mode. And that means data in the U.S. to make sure the U.S. is moderating and data outside the U.S. to make sure that we're still in the middle of the dollar smile. But obviously, if we are in this sort of regime, that gives you a lower intensity of dollar weakness.
So that's sort of the starting point and that's the thought process so far. But let's let's turn to this Russia-Ukraine story. And I should say at the start, you know, we're recording my day Friday, so we don't really know what's going to happen really with this Trump-Putin meeting.
What I can say is that for me, the transmission mechanism from this outcome is really going to be through energy prices. That's really ultimately what we care about from financial market standpoint. And, you know, if we do get lower energy prices, we do get some ceasefire, which, you know, we talk about with Anushka is a high bar.
But if you do get that and you get lower energy prices, that should be a dollar negative from a terms of trade standpoint. It should be supportive for the euro and it should be supportive for energy importers globally. And some rules of thumbs for at least the euro-dollar, I would say, is that it should boost euro-dollar 2 to 3 percent.
You know, our estimates are one and a half percent of that mechanically comes from a terms of trade boost directly from gas prices and potentially Brent. And then perhaps the sentiment boost is worth around a percent or so. And I think high beta currencies in the region could do particularly well.
So, you know, that's sort of the euro and the broad dollar view. But Anushka, let's start with, firstly, what is your view on how things will unfold in these talks? And what are the various scenarios you're considering?
And of course, how does that translate into the currency impact? Hi, everyone. So thank you for having me here.
Obviously, we have here a geopolitical event and geopolitical events are always hard to predict. I mean, we normally struggle to predict even macro events, but geopolitical events definitely raise the bar. Now, the way we are thinking about it is really scenarios and trying to attach to that certain likelihood to what we think is more likely than not.
We probably wouldn't be able to predict every modality of what comes out of this meeting, but kind of focusing on where we think outcomes could be and what the probability is. The first scenario for us, the most probable one, and this is new for us. My colleague in economic research, Nikolai, spent a lot of time covering this conflict.
And I think now we've reached perhaps a point where we have a good chance of a partial ceasefire. When we think about partial ceasefire, what that means or where we think what that would mean is a real ceasefire. So a ceasefire on attacks deep into territory, not around the front line, with fighting in the front line continuing.
So a partial deal. At this moment, we feel that all involved parties would have some stake in such an outcome and that raises the probability that that could be agreed. We are still relatively unconvinced about the probabilities of a full ceasefire or going even further into a peace deal.
It's always very difficult to predict all the modalities of what might come out of that meeting. One outcome could be simply that it's postponed to an additional meeting and then we have to wait for that. We might have more uncertainty.
Now with an aerial ceasefire, perhaps there could be other things announced. Where we are focusing is if something might be announced on the energy market, especially on Godfors, as you've mentioned, that's hugely important. Other aspects that could matter are perhaps the sanction regime in general on Russia.
Something that we are also focused on globally for EM is whether that impacts on the threat of secondary tariffs. So these are the modalities that could affect the market price action. In terms of what it means for the currencies that we cover, well, last time we've seen the largest hope reaction in CE and actually right now the reactions are quite contained compared to what we saw in Q1.
And I would say that that's reasonable because the starting points of valuations are much more expensive. Having said that, if you look at who would benefit the most, I completely agree with you. It's the energy importers.
So we think that the largest beneficiary could be Hungary, Turkey. One thing that stood out to me is that in Q1, the FX market traded a lot more actively. The growth angle of it with higher correlations to European equity prices of companies that might benefit from some reconstruction effort, we are actually seeing that aspect not being priced very much this time.
So that could be one opportunity to work out last time the Zloty correlations were highest to this aspect. The final thing I would highlight on this topic is that actually we see a potential that some of the largest reactions might not even be in this region, which is obviously most related to Russia. It could be in Asia because that's where the secondary tariff issue is pertinent.
That's where, for instance, we would say INR probably is pricing some risk premium for secondary tariffs and therefore the outcomes of the negotiations could matter there hugely. Yeah, that's very interesting, Anoushka, because one thing we are seeing is some dislocation also from that equity price index that you mentioned versus some of the high beta currencies on the DM side like stocky, for example, but clearly the one key difference and this is where I think the sentiment effect when I had calculated that or estimated that for the euro back in Q1, it was much higher. I thought it had the potential to be like 3% or so because euro dollar was quite cheap and was undershooting at that point.
But clearly at this point, we've got the opposite problem where a lot of optimism is already priced in. So this helps but doesn't necessarily mean that it's going to be the same magnitude. But equally, from my point of view, I also think that if we don't really, because the reaction hasn't really been that pronounced so far, if we don't really get any sort of favourable outcome here, that the market reaction should equally be pretty downbeat and shouldn't really make much of a difference to the outcome for markets if we don't really get a positive outcome here.
I would definitely agree with that. I think that for most of our currencies, the risk is quite symmetric here. So if we get something positive, they appreciate a little.
If we get something negative, maybe they depreciate a little, but nothing particularly dramatic on the depreciation side. Okay, thanks for that. And then beyond this particular issue, what are your highest conviction views within the region and also just more broadly?
So we are bullish generally across the world constructing here some of the same drivers that you mentioned yourself. Regionally, I would say EMEA-EM is the sweet spot where we are seeing the lowest growth impact from tariffs, perhaps largest policy supports with already extended monetary policy cycles so that you could think about some desynchronisation versus the US and the monetary policy cycles. That does not mean we don't have long in the other regions, but I must say I quite favour EMEA-EM in this setup and it's obviously the region closest to my heart.
In terms of if I would mention any specific stories, well, we found better levels after the sell-off. So we like quite a few things. South Africa has a lot of commodity in terms of trade going for it.
Levels have become more attractive in some other places. Another story I would mention is in Israel, we still like the FX Hydration story as well. Okay.
Thanks, Aneshka. And that does mirror, by the way, our own conviction level when I look at the global landscape as well. It's very much a Euro-centric sort of view of the world and Asia is going to be naturally contained because China is not going to be letting Yuan strengthen a lot here.
So it does leave Euro given the fiscal angle as well as really the epicentre of this. So thanks for that. Let's move on to DiEM and James, let me start with you for the same question, which is if we do get a potential ceasefire, that would be clearly good for high beta currencies in the region like stocky, for example.
But let's talk about Swiss. How would it change your outlook for Swiss? It is a defensive currency, but it's held up pretty well.
Would that be enough of a trigger to re-evaluate the bullish view on Swiss that you've held on to so far? Yeah. I mean, if you saw an actual ceasefire, then that would be a game changer as it would for many currencies.
I think if you look at Euro-Swiss now, it's around fair value at these levels. You know, if you start thinking about higher probability of a ceasefire, then you can start to think about at least a 1% to 2% overshoot versus fair value. But I think if it is a partial ceasefire, then as you were saying before, I think markets will remain a little bit sceptical and any kind of headline knee-jerk could be faded and the market has potential to look through that kind of outcome.
But thinking about a ceasefire and the ramifications for growth, regional growth, that does kind of build on top of some of the resiliency that we've seen in the data recently, the regional and the global level. So that's when you start thinking about, okay, Swiss is a safe haven currency. Can you start to see outflows there?
But again, I think a lot has to go right for that to happen. I mean, as you say, I think partial ceasefire is the base case. And then when I think about the data more broadly, I think you are seeing resiliency.
But when I think about kind of the drivers of the global business cycle, I don't really see enough there to kind of get really excited about a kind of trend move in growth that Swiss can sell off on. So you think about the anemic China credit growth that we're seeing, the slowdown in housing markets that we're seeing across DiEM, the sticky level of yields that we're seeing. That I think on a forward-looking basis just makes it a little bit harder for growth to really accelerate.
I'm on board with the resiliency story, but I don't think it's a world where you see Swiss really selling off hard on a kind of global growth boom. And then you have the other kind of more bottoms-up factors where you have like a bit of a constrained S&B in terms of intervention and the policy rate on the policy right now. It just allows balance of payments flows to be a bit more influential and purchasing power parity of call to be a bit more influential for the franc.
And that those are bullish supportive factors. And then ultimately, I think if we do see another week US payrolls print, we're going to be sat here talking about support for the funding currencies as you see a bit of yield compression. So, you know, it's not a gung-ho bullish Swiss call by any means, but, you know, I think there's enough there to hold on to the bullish view.
So for Stocky, I think it's the somewhat easier call in terms of you've got an economy there in Sweden, which is more directly tied into European manufacturing, the more open economy, the more cyclical high beta currency, which we saw, you know, really take advantage of the defense spending theme in Q1 across Europe in terms of Stocky's performance. So I think if you were to see, you know, ceasefire probabilities really ratchet up, I would point towards Stocky in my space as the currency that would be able to benefit, you know, most greatly. I think you can you could easily see a move back down towards 1080 and below for Eurostocky in that in that instance.
And then the other currencies, I think it's a little bit more two way in terms of, you know, you mentioned energy prices being the key channel. So if it is energy prices, then you have to think about terms of trade for Norway. That's going to take a bit of a hit, but I think that's somewhat offset by the kind of risk, risk positive outcome that you see.
So it's a bit of a wash for Nokia. And then Sterling, you know, it is an energy importer, but obviously it's it's it's an economy dealing with inflation, sticky inflation. It's a carry currency.
So I think lower energy prices on net could be even bearish for Sterling. But then you have obviously the risk positive impact and the impact on growth, broader regional growth filtering through to the UK a little bit. So, again, it's I think it's a little bit of a wash for Sterling as well.
Thanks for that rundown, James. Good segue into Sterling. I guess we've had now a hawkish BRE meeting.
You know, we've had OK data this week. We've been very sterling, you know, where does this leave our view? And then on the Scandi central banks, obviously, we've had one this week and this one next week.
Can you talk about that as well? And implications for the currency? Yeah, I think, yeah, obviously, the Bank of England was a bit of a setback, a hawkish vote there.
I don't think there was a single submission to the vote survey actually before the meeting that had, you know, that kind of vote outcome in terms of, you know, the one for four and the five four. So cautious to read too much into it, though, I think, you know, we've seen before the Bank of England flip back on themselves several times in terms of if the data warrants it. So, you know, I think the kind of lead indicators that we're looking at the second half of the year, you would think that if you continue to see labour market weakness come through and let's see what super core services inflation does next week in terms of, you know, you have a signal there from the services prices component of the PMI saying that you will see a step down there at some point in the second half of the year.
So that suggests that, you know, you can see the Phillips curve come alive a little bit for for sterling potentially in the second half of the year. And I think that that's what Bank of England wants to see in terms of their guidance last week seemed to shift away from the labour market a little bit relative to the commentary before before the meeting and prioritise a little bit inflation and maybe that the lack of impact on inflation that the labour market is having. So but I would say, you know, the bearish sterling thesis is not predominantly based on the Bank of England.
I think the Bank of England can provide a kicker. And you look at pricing now, we're not even pricing one cut for the rest of the year. So there's a little bit of asymmetry there in terms of it's going to be hard to price out much more for the Bank of England.
But obviously, you have the budget coming up in the second half of the year, which I think the fiscal risk premium in sterling for that has room to expand. You know, we saw back in twenty twenty two euro sterling got around five pence rich to fair value. It's actually back in line now when we introduce a kind of fiscal risk premium proxy into the model.
At the same time, you have sterling still screening bottom in terms of the ranking on our quant teams model for activity data. And you see it. You've seen a bit of a decoupling on the activity surprises for the UK relative to major peers like like US and eurozone.
So it still looks like there's some idiosyncratic growth drivers in the UK that are weighing on performance, you know, whether that's the labor market or the housing market or tax policy. So our view is that the bearish sterling view is still intact for the second half of the year and that there's multiple channels for that. There's the fiscal channel.
There's growth inflation, the labor market and Bank of England. So, yeah, I'm I'm not totally deterred by by what we saw. And I do think yesterday's PPI print in the US.
Let's see how we go. But, you know, if that is the start of. Potentially material renewed inflation that the market's been thinking about for some time now.
You have the beta of the UK long and to the US, which we saw way on sterling in January and April. That kind of brings another angle for sterling in terms of the stagflationary reaction function. So I think there's too much going on for us to have seen the highs in in euro sterling and in my view.
Thanks, James. And then and then maybe on the Scandi central banks and then we can wrap up. Sure.
Yeah. So on the Norges Bank, I mean, we were expecting it to be a pretty quiet meeting, but we did say that if there's no explicit guidance for a September cut, then that just introduces some kind of hawkish uncertainty given that September is pretty well priced. And that's that's what we got.
You know, there was no explicit guidance for September. In terms of the rate cut there and in the statement yesterday. So, you know, that should make the currency a bit more sensitive to data surprises going forward.
So we get GDP next week. We get the labor market data in Norway the week after. And you know, you now have a Norges Bank, which looks a little bit more uncertain about the easing cycle so that that can offer some some support to Nokia.
The other kind of pillar of the thesis is is is relative growth. You know, the idea that Norwegian data has held up better, particularly on the higher quality surveys like the regional network survey, you're seeing explicitly the survey telling you that the economy has been resilient to the global trade uncertainty and that that makes a lot of sense given that it has the lowest manufacturing share in G10. So you've got an easing cycle for Norges Bank, which was well priced before the meeting.
And now there's actual hawkish uncertainty around that and the relative growth angle. So we think Nokia can be relatively well supported by that going forward. And then for the Riksbank, you know, I think the meeting next week, it's again, I think that they're going to probably stop short of explicitly guiding for a September cut.
It's about half priced in the market right now. Our economists forecast, say, a September cut. So, you know, there's there's potential for a little bit of weakness in stock.
If, you know, if there's some some hints that the central bank wants to keep open a little bit more optionality for September, you know, you look at where growth is versus the forecast is tracking well below. So the Q2 GDP indicator was 0.4 Q on Q versus the Riksbank at 3.5. But inflation is running slightly above.
So that constrains them a little bit. But, you know, our view is that they can potentially go in September and, you know, that that that maybe brings in a little bit of tactical risk for stocky next week. But I think the bigger, more medium term picture is that if we if we do see the dollar start to weaken and we do see that carry to value rotation and we do see Riksbank easing start to support activity again, then over the medium term, stocky can be quite well supported.
But if you're looking for a kind of tactical view, then then next week's Riksbank meeting, I'd say the risks are kind of marginally on the dovish side for the currency. Interesting. Stands out very much in contrast to New Zealand, where we are looking for no cut, which is, I think, out of consensus view.
So sort of sets up differently for Kiwi here. But it looks like overall, a lot of things contingent here on what the next move by the Fed is. And with that, let's stop here.
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This episode was recorded on August 15, 2025.
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