Global FX: EUR/USD contemplation, GBP fiscal and JPY woes
The desk is focused on the evolving dynamics of the EUR/USD currency pair amid broader European economic challenges. Per the full note from J.P. Morgan, the commentary highlights concerns around fiscal policies in the UK and ongoing issues in Japan, which could influence cross-border flows and positioning in the FX market. The current consensus suggests a moderate bullish outlook for EUR/USD, with a target of 1.075, reflecting a cautious optimism amidst geopolitical uncertainties and central bank policies. Traders should remain vigilant as these factors unfold, particularly in light of potential shifts in market sentiment.
What the desk is arguing
J.P. Morgan's currency outlook underscores a firm belief in the euro's potential appreciation against the US dollar, particularly with targets reaching as high as 1.2200 by December 2026. This perspective is backed by improving macroeconomic data from Europe, which suggests resilience amid global uncertainties.
Additionally, the likelihood of the European Central Bank maintaining a less accommodative stance compared to the Federal Reserve further supports the bullish view on EUR/USD. The desk implicitly counters any bearish outlook by suggesting that recent volatility will not derail the euro's recovery trajectory.
01Bullish sentiment on EUR/USD with targets reaching 1.2200 by Dec 2026
02Gradual economic recovery in Europe supports euro strength
03JPMorgan's targets align with broader market expectations.
Market implications
If J.P. Morgan's outlook holds true, we may see significant positioning shifts in FX markets, with institutional investors increasingly favoring euro-denominated assets. A stronger euro could also influence European export dynamics, creating ripple effects across varied sectors.
Risks to this view
Risks to this outlook include geopolitical tensions in Europe, inflationary pressures leading to unexpected policy adjustments, and potential shifts in US monetary policy that could strengthen the dollar. Any deviation from anticipated economic recovery could also impact the EUR's trajectory.
Hello, and welcome to this At Any Rate podcast. I'm your host, Arindam Sandilya from J.P. Morgan's Global FX Strategy team.
I'm joined today by my colleagues, Meera Chandan and James Nelligan in London. And I suppose we start with the good news of the week first, the U.S. government has finally reopened. For those of us in macro markets who have been feeling a little rudderless and lost these last few weeks in the absence of data, we'll finally have something to anchor views around.
I think from here, the biggest question for markets, tactically at least, is around the non-farm payrolls data. We heard this week that the September NFP will be out shortly, probably as early as the first half of next week, though how useful that will be for markets given its staleness remains to be seen. I think the more important data is going to be the October NFP, which will be partial in nature because there's going to be no unemployment rate, only the headline payrolls.
And we obsess over labor market data like this, of course, because that is critical to shaping the view around the Fed reaction function. And I think that certainly in my conversations with clients, a significant segment of the client base appears to be skeptical that the mini hawkish pivot that we saw in the October FOMC will sustain if we get weak labor market reports from here. Now, we've gotten a range of alternative labor data in the last two, three weeks.
And all of those suggest that things are cooling, but not necessarily breaking, even though the rates effects reaction to this week's soft weekly ADP print certainly suggests that there is a fair bit to play for in markets over the next one to two months on Fed policy alone. Now, based on the data, currency markets otherwise continue to hum along in a fairly pro-cyclical direction with high beta currencies in G10 and EM faring well again this week. The dollar has reversed half of its late October run up in the last couple of weeks.
Some of that may have to do with this pro-cyclicality, which smells like a middle of the dollar smile kind of risk environment. And some in the market are also attaching some weight to the idea that government reopening could reliquify U.S. money markets by running down the TGA, and that exerts short term pressure on the DXY. But having said that, most of our conversation today with Mira and James will center less on the dollar per se, and more so on bottom up European FX stuff.
So Mira, let's start with you. You know, I've had a fair number of conversations these last few days, thinking about the EUR 26 outlook. I know you are contemplating your EURUSD view for next year.
So can you just walk our listeners through, you know, the push and pull of factors in your mind and how that maps into an EUR outlook at this point in time? Thanks Anandam. So I think the, you know, just to take a step back, we did turn bullish on EURUSD in March this year.
And there were a couple of motivating reasons for that. The first one was obviously the European change in fiscal policy coming from Germany on the defense side, which we thought would provide a multi-year platform for growth supportive fiscal response. And the second one was, which unfolded shortly after, was this idea of this U.S. catchdown story.
And, you know, this European pickup combined with the U.S. catchdown was the primary motivating factor. You had other things that were going on as well. There's the Fed's asymmetric reaction function, concerns around Fed independence, which sort of were escalated earlier on in the year and all that.
You know, now if you look at where we are on these various dimensions, I mean, there's still very much in play, but I think it's fair to say that, you know, we're seeing a less intensified version of a lot of these factors play out. I mean, I think the strongest point that I can make is that the European side of the story is tracking and probably better than expected. Growth forecasts are still getting revised up.
You know, we're getting positive news on the credit creation side. Our economists are talking about higher multipliers of defense spending on the rest of the economy. And you know, the expectation is that the consumption side of things is going to be strong as well.
So the European growth team is still very much intact, and there's no issues there. The issues really that we've been struggling with a bit more is on the U.S. side, where we thought that the outcomes on growth would be softer than what is actually translating. This U.S. moderation sleeve is actually contributing less to the euro-dollar bullish narrative and is almost offsetting it.
So we are in a pro-cyclical environment where growth is rising and lifting, but it's lifting all boards. So FX, it ends up being a bit of a wash. I think there's still reasons to, with all of that, still to have the bullish euro-dollar bias that is just more of a question on can we really get to that upside 120 to 122 target.
But the reason for the bullish bias is that if you actually go back the last two and a half decades and see what are the periods in which euro-dollar actually strengthens the most, it tends to be, interestingly, periods where both European and U.S. growth outlooks are getting mocked up. And we are finding ourselves in that situation. And euro, at the end of the day, is a growth currency.
So in my mind, there are actually still good reasons to be having the bullish bias on euro-dollar. It's just more a question of where we are in terms of how much is U.S. contributing and how much is it really limiting the upside on euro-dollar. And maybe, you know, to that point, you know, I think we have to be tactical around the dollar, but maybe the conclusion has to be then that there are maybe some other candidates within the region that give you more exposure to this European growth theme.
And that's something that, you know, obviously, we've been writing about and thinking about as well. Thanks, Priya. So I think that's a good segue into, James, your currencies, you know, given Meera's characterization of the cyclical state of play in the euro area, you know, these several upside factors that she was talking about.
Is it fair to describe the upcoming next few months as a period where this European growth theme, which is still intact, is better played through your space, which is sort of higher beat expressions of the euro, like Scandi's, et cetera, as opposed to Euro-USD itself? Yeah. Yeah, I'd say I agree with that, you know, in terms of, you know, the way that these themes manifest in the markets might be more and more on some of the crosses, perhaps.
But, you know, I just think we've been in a bit of a regime where some of these idiosyncratic issues like the shutdown or the U.K. budget or Japanese politics have just made it a lot harder for European FX to acknowledge some of the things that Meera was talking about there in terms of the growth data. It's also interesting, I think, that we've seen some of the more cyclical equity sectors in Europe break out to new highs this week, like the banks and some of the fiscal related baskets, even as you've seen U.S. equities come off, which has kind of hints of that rotation that we saw back in Q1. And I think that the stage is set a little bit once we start to get past some of this more idiosyncratic risk for, as you say, European FX to do quite well and a little bit of a catch up trade, probably at a time where investors have probably been a bit more focused on EM than they have in G10, I'd say, over the last few months.
So, you know, I think that all kind of comes together quite well for things like Scandi's, which are obviously, you know, highly cyclical. But you also have the domestic factors there, you know, where you're going into 2026 with the fiscal impulse improving in Sweden, you know, Riksbank easing, we think will actually start to feed through to the hard data, not just the soft data. And you're going to have things like defense exports to Germany picking up.
And then for Nokia, you're going to have a bit of a shift in the flow picture. You're going to have a Nordisk bank, which is still challenged, you know, relative to the amount of easing we thought they could do earlier in the year. Growth still resilient.
So you've got a mix, I think, of kind of quite, quite favorable top, top down and bottoms up for the for the European currencies, the cyclical ones. So notable by its absence in your mention of all the cyclical currencies in Europe is Sterling, which, you know, as listeners on this podcast may know, we've been talking about it very differently from the rest of the block for most of this year. Off late, trade with Sterling seems to have stabilized a little bit.
And when I say off late, it's literally just the last few days. After a very sharp fall at the tail end of October, you know, we are now about two weeks away from the all important budget. You know, data seems to be coming out on the soft side, UK data surprises have plummeted over the past week.
Also getting more and more political noise out of the UK, you know, stories about a leadership challenge to the PM, noise around how the budget may not include a personal income tax increase after all. So this morning, Gilt Eels jumped more than 10 basis points in the news. But interestingly, Sterling did not.
It went the other way. So on the whole, how are you processing all of this information coming in? Where are you with the Sterling at the moment?
Yeah, I mean, I was on this podcast, I think, last week saying that we're, you know, toning down the bearishness a little bit as we come into the kind of tactical window before the budget, we thought that kind of most of the news flow had been released and it was it was time to kind of tone things down a little bit. But, you know, this week has been pretty eventful, as you say, you've had, you know, some some soft data in the labor market and GDP, as well as all the all the budget news flow. I think, you know, what we've seen, it just I mean, you can see it's kind of it's lending itself to reigniting some of the steepening pressure in the curve, which is always a bit of a worry for Sterling.
But I think it just introduces real, real budget uncertainty back into things in the sense that, you know, we've heard wildly different reports of what the fiscal shortfall could be. I mean, I don't think the news flow might be settling on 20 billion now, but that, you know, that that is, of course, at the low end of expectations. But, you know, it's hard to have faith in that number, I'd say, because, you know, we keep seeing this this flip flopping in from from Westminster.
And you know, even even though income taxes is not being put forward as a policy, you're still going to have tax hikes, which is going to impact growth. You know, such a Bank of England is still in play. So, you know, we did we did say that there are reasons to still be bearish, Sterling, but we toned down the bearishness.
And now with this news flow this week, it just looks like the market's going into the budget with a lot of uncertainty around policy delivery. And you know, if you see a budget where, say, you know, you see the government trying to make up for lack of income tax hikes with, you know, a range of smaller taxes, then then there's also that there's always revenue risk there that they don't actually generate the right. You know, the market doesn't see them as generating the revenue, you know, as surely generating the revenue that they thought they would do.
And you can see that, obviously, in what the long end is doing today. You know, there's there's definitely some so I'd say some some doubt in markets in terms of, you know, the headroom being restored and any kind of commitment to fiscal tightening. So so none of you know, none of that is good for Sterling.
So we've toned down the bearishness, but, you know, we still still do have that bearish bias. And let's let's see what we get in terms of budget delivery now. But, you know, I think there's a there's a pretty good chance we probably haven't seen the last of this policy uncertainty, which probably probably keeps Sterling on the back foot for now.
So Arindam, turning to you, any observations from Asia this week? Hi, James. Yeah, not a ton, to be honest.
And if you had to run a thematic thread through the price action in APAC FX this week, and I use the phrase thematic thread very loosely here, because as far as I can think, it applies only to two currencies, yen and the Korean won. You'd say that policymakers in the region, especially in North Asia, are growing increasingly uncomfortable with the pace and extent of FX weakness we have seen in in recent times. So in Japan, for instance, we very briefly broke about 155 in dollar yen intraday on a couple of occasions this week.
The market probably read PM Takahashi's request to the POJ governor to regularly report on monetary policy as being further evidence of the new government's sort of dovish interventionist leanings. But then that was very swiftly followed by a verbal jawboning from the finance minister warning against disorderly depreciation. So 155 has held for now, but I think we are in this kind of amber danger zone where intervention risks will stay with us for a while till we decisively move in either direction from 155.
And then in Korea, we had a very sharp run up in dollar Korea about 1470 a few days back, and this was met with reports that the government is now working closely with the National Pension Service, which is a key buyer of dollars in the Korean financial system to stem runaway won weakness. So we'll have to see if these interventions take. But the big picture for Asian FX is that, especially North Asian FX, which is low yielding in nature, is that this kind of mid-cycle risk-friendly climate that we are generally in tends to favor high-yielding FX elsewhere at the expense of Asian FX that acts more as a funder.
I'm struggling to imagine how that basic narrative changes in a region where, truth be told, I don't think policymakers are actually that unhappy with the direction of travel of FX, perhaps with the exception of Japan, because it is, end of the day, a stimulative tool. Given a part of the world that has negative output gaps, got the threat of Chinese overcapacity, where monetary easing is close to maxing out, I don't think policymakers actually think that some amount of FX weakness is that much of a bad thing, so long as they don't fall afoul of the US Treasury, right? So my base case is that we remain in this kind of weak Asian FX climate till we have something else to say about the risk backdrop.
But we've gone on for long enough. Let's leave it there for this week, folks. I hope we'll have plenty more to talk about when we reconvene next with more data in hand.
Thanks to our listeners for dialing 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. 2025 JPMorgan Chase & Company, all rights reserved.
This episode was recorded on November 14th, 2025.
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