Global FX: EUR-USD divergences, systematic signals, sterling struggles

Hello and welcome to J.P. Morgan's At Any Rate podcast. I'm Meera Chandan, co-head of FX Strategy at J.P.

Morgan, joined today by Patrick Locke and Antonin Dallaire from Macro FX Strategy and Systematic FX Strategy, respectively. So never a dull moment in FX. This week was no different.

Of course, by the way, J.P. Morgan did have its Paris conference, so it was great to see many of you there. But, you know, the FX world carries on, and there's quite a bit that we do need to discuss today.

I think a couple of top-down issues from our side, firstly, the dollar and the euro as well. Also, you know, and I think the second top-down view, I mean, in this world where macro conviction is sort of pretty low and we're going back and forth on a lot of topics, I think it'll be useful to know what's going on with that systematic signals and what the message is from them. And then finally, you know, a couple of bottom-up issues as well.

We're going to talk about sterling, of course, given all the political developments there. And then, of course, a word on CAD, the Canadian dollar as well, because there's some interesting stuff there as well. So let's just start top-down with the dollar.

I should just say up front, you know, regular listeners will know that we've not really been that convicted on the dollar since this year US-Iran conflict has started. You know, we generally try to be pretty sort of more medium term with particularly with sort of the dollar regime identification and our dollar stance. And I would say before the Iran conflict, we were pretty steady with that.

So for example, I think we were probably had a better stance on the dollar for almost a whole year after the German fiscal announcement in March of last year. So that was a pretty lengthy period. And post-conflict, we've been, I'd say, you know, taking more tactical views.

You know, you first turned tactically bullish on the dollar. That was more as a hedge against this terms of trade energy price blowout hedge, which never really quite materialized in the way that financial markets were thinking about in terms of fail risks. And then, of course, we pared that back, turned modestly bearish on a potential resolution.

But we've also been noting in recent weeks that there are certain macro forces in the background that are really pushing us towards this various shades of US exceptionalism coming back into play. So first, we've had labor markets data, for example, things like headline payrolls that bottomed out and actually showed an improvement. The dollar was lagging that you've had in the latest Fed meeting from a couple of weeks ago now, you know, three dissents against the easing bias.

And of course, from the conflict, we already knew higher energy prices is net positive for the dollar. But then this week, two things really stood out to me. I mean, first, the inflation trends and maybe, Patrick, I can turn to you on that.

You know, what are the main takeaways there? But what's interesting there was that it's really pushing the you know, if I compare it to your dollar, for example, the EU versus the US real yield differential, it's making it much narrower, pushing it against the euro. And second, what really stood out to me also, and this has been an ongoing thing in the last couple of weeks, but a stat that really stood out to me from our equity strategists actually, is that is that we had EPS surprises in US earnings, EPS beats were basically running the magnitude of about 18 percentage points on the beats.

And in Europe, that number was only 4%. So that divergence in sort of the earnings surprises, I think, is also in large part exaggerating and really intensifying the divergence between the equity market returns, US versus Europe. And that really stood out to me in the price action as far as equities are concerned, also in the last few days.

So I do feel like we're going back into this, you know, sort of US shades of US exceptionalism story. But let me just take a quick breather there. Patrick, let me turn it over to you.

What were the main takeaways from the inflation trends this week in the US? And obviously, market pricing for the Fed has changed. Any comments on that as well?

Yeah, thanks, Meera. And just to frame what happened this week, I go back to the CPI print, not just last week, but the month before, where core, you know, basically came in under expectations. So I think a month ago, people were thinking, maybe this spillover is not so bad.

Last week, CPI was, I'd say, was a little bit more unconvincing. Services in particular were firm, even though core goods were flat. But probably over the last month or so, in terms of inflation data, you hadn't seen any real kind of like red flags, right?

That changed, I think, this week. You know, the PPI beat in particular was very intense, with a big jump in core. And then also, you're seeing elevated import and export prices as well.

And again, I frame this, you know, versus expectations. You look at kind of like inflation surprise indices in the US, and they've had one of the bigger month-over-month jumps, you know, basically since the inflation spike of 2022. And that's in the context of, I think, a lot of people basically being under the assumption that in the US specifically, shocks to energy price inflation on the headline does not spill over that, obviously, in the core.

But I think after this week, you have to reconsider that a little bit more seriously. Because again, the services and the super core last week were suggesting some degree of breadth, and then obviously a little bit more of kind of a core impact this week. So I do think there is room here for the market to kind of continue to rethink and reprice what the trajectory of the Fed might look like.

Now, obviously, it's gone some ways already, like the three-month, three-month, one-year kind of curve is positive for the first time in a few years. There's like a 30% or 40% chance ascribed to 2-plus height by the middle of next year. But I continue to point out that the US OIS strip, compared to the G10 average OIS strip over the next 12 months, is still pretty low.

And frankly, I think there's two-sided risk to that kind of compressing. One, just from continued strong data in the US. We also had a good retail sales print this week on top of the higher inflation data.

Or if the straight-over-muse situation does kind of resolve and energy prices go down, you could see, obviously, hikes taken out of stuff like the ECB and the BOE curves, which also compresses rate a little bit more towards the dollar. So I think kind of this inflation shock that we saw this week, against the context of where relative rates are currently priced, I think that skews positively from the dollar from here. Yeah, thanks, Pat.

And, you know, so we have become bullish on the dollar again. And I would just stress that, to me, yes, you know, the US exceptionalism, the Fed terminal repricing, you know, which may well be reaching its local limits, but, you know, I don't think that's the only thing that's driving this. I think it's the growing divergence that I'm seeing on multiple dimensions, particularly versus Europe.

And I would say there, you know, if I look again at the European real yield differential versus the US, we've, at this point, given the move in the last week or so, we've completely retraced the widening that we had seen in rate differentials following the German fiscal announcement. So that's completely been unwound now. And I'm seeing similar things with sort of the relative equity market performance as well, Europe versus US.

So I think the negativity around Europe, it's not just about sort of this shades of US exceptionalism coming back. It's also about negativities, particularly around the eurozone getting quite entrenched and intensifying. So for what it's worth, you know, we are lowering our sights on sort of the euro dollar targets, if you will.

You know, previously, we were thinking that, you know, we could get to potentially a 120 or something like that in the second half of the year. And certainly, if we do get any sort of de-escalation with Iran, you could see that knee-jerk higher. But I do think that that's now going to be short-lived, just given how entrenched some of these macro divergences have gotten.

So rather than looking at for 120 now, we're sort of lowering our sights more in the 113 to 115 area in the second half of the year. So I think that's one shift that's definitely worth noting. And I would just stress that that's probably the first time in a year that our, you know, our forecast trajectory is actually showing a bearish outlook for euro dollar.

So that is that's a pretty big turnaround. I mean, I would say in reaction to the conflict, we hadn't actually rushed it to change our medium term forecast here for euro dollar, but I do see things getting a lot more entrenched. And so, you know, for euro, given that it's a low yielder and we've seen all these weaknesses, I think that's quite relevant.

I think, Pat, you feel the same way about the Canadian dollar as well, isn't it? Yeah, that's right. I think long time listeners will recognize we've had a bearish bent on CAD for a long time.

I'd say that's been amplified definitely by the developments over the last couple of weeks. And to be sure, you know, coming into this year, we had a dollar CAD upward sloping forecast back towards 140. I think consensus was a little bit more of a kind of a downtrend.

But, you know, we've always been saying the U.S. fundamental picture is just it's just better than Canada. And I think that was reinforced last week when you had dual payrolls basically go in opposite directions, a better U.S. print and a very weak Canada print basically taking net job losses in Canada to about one hundred thousand for the year and the unemployment rate back up to six nine. So that to me continues to make the BOC pricing look off sides, especially relative to how the Fed is currently priced.

So I think you generally have a better, more organic dollar story building, a still weak Canada. And so I think mechanically that just implies that dollar CAD should continue to be biased upwards. And of course, you're collecting carry in the meantime, which I think is a you know, that's a helpful kind of a tailwind as well.

Yeah, which is also the case for the euro as well versus the dollar. But OK, so look, that's that's from the macro top down. Let's just turn to something a bit more tangible here, Antonin, you know, from from the lens of a macro strategist, it's pretty hard these days.

I feel like the macro teams are splitting pretty quickly across teams and it's hard to have longevity in any kind of thematics. What are the systematic models on currencies actually telling us? Is there any main takeaway that that, you know, we should be focusing on here?

Hello, I'm going to start by going back a bit on this euro versus dollar discussion. So the dollar still screened decently OK across our signal, but euro is now the worst ranked currency on our multi-factor approach across like 27 liquid currency. This is by no means news that our signals have been weak for euro, probably not bottoming to the same extent as now.

In general, as you mentioned, for euro, the carry is poor in the cross section, both in the real and risk adjusted term. Gross momentum metric are also weaker than many other currency and the long term valuations are not especially attractive. But the two signals that sort of stand out and you also a bit mentioned it, especially against the dollar are like first the momentum in the commodity term of trade, which is obviously not good for euro with the current energy prices, while on the other hand, for the dollar, it's currently top two in the entire cross section for this signal specifically.

But the most recent and important one, in my view, that you also mentioned is the momentum in equities only favor in favor of the US versus Europe across 27 currencies. Again, the dollar is top three in our equity momentum just behind Taiwan and Korea, while euro is probably middle range. For me, it's the most important change in the past week because euro has been weak in our signals for a long time in February, even before Iran, it was already weak.

But the missing piece for me was the relative equity under performance. And I previously mentioned that if I had to keep one signal in general for euro dollar in the most recent year, it would be this one, the relative equity in my view. Obviously, as discussed by a macro strategist, inflation and reaction function of the two central banks matter and needs to be watched.

But for me, it's an important development that could signal your weakness. My second point would be more regarding global and E.M. carry factors. First, I need to mention that E.M. carry basket took a moderate hit over the last month and generally down between minus one to minus 2.5 percent, depending on the implementation, nominal or risk adjusted and the currency.

And my point would be to say that I see some headwinds short term for global and E.M. carry basket, the most important currency for, I would say, the liquid in the liquid carry space are Brazil and Colombia. And currently, no signal. Both have deteriorated significantly.

Although there is still some bear along, you know, optimised multi-factor portfolio, but there is still there is also more volatility there. So it's generally an issue for the carry factor. If you think it's longer term, while in general the macroeconomic development are generally favourable, you are in an inflationary background with central bank considering again.

There is still a main scenario of this ungrossed globally from our economies. Despite higher oil prices, it's generally good for carry, especially real carry, but short term we see a bit of an issue. As a side note on that, I would just say that there is generally overlap between carry and long term price momentum.

People tend to pile in the same trade, but recently the trend of price momentum long term has been doing better than the carry, specifically for global portfolio. At least it handled better the underperformance of Asian high yielders. And my third point would be to focus more generally on G10 and especially there, like G10 carry has been actually quite strong.

If you consider G10 carry factor has printed plus four percent since the beginning of April. In fact, a lot of our cross-sectional baskets in G10 are working carry, cross momentum, fiscal basket, commodity momentum, external balances basket. They all delivered between three to six percent year to date, but they're absolutely not independent.

A few positions concentrate all the performance this year on the long side. It's going to be Aussie and Nokia on the short side. It's going to be yen and stocky.

Our conclusion here, at least from a signal standpoint, is that there is no real reason this should stop in the sense that these conditions are still relatively unchanged. For instance, Nokia is still top in all our G10 signals like high carry, strong external balances, commodity term of trade momentum, fiscal growth momentum, everything is still there. Obviously, geopolitical development matter, but for our macro point where we exclude this and we consider it unpredictable, a concern may be come from the fact that when, you know, when the few currency like that are at the intersection of all the relevant driver, you can expect positioning issues.

Some of the low frequency trackers and semi systematic approaches should logically be innate as they all leverage those inputs. But this does not change the fact that these dynamics still screen bullish for now. That's all for me.

Thanks a lot, Antoine, and that's very useful, actually. I think it's worthwhile noting that some of the G10 high yielders are still screening pretty well, but then some of them are coming under pressure on the global and EM side. So that's an interesting sort of follow through.

And I think it also just gives us a bit of a framework for thinking about the world at this point. I really do think the relative U.S. equity performances is really quite eye catching at the moment and can be quite meaningful for markets and for the dollar as a source of support in particular. But let's let's wrap up, I suppose, with Sterling.

And I think, look, a lot of stuff has happened on the political front at the time of recording. It looks very likely that there will be a leadership challenge, although when that will happen is not clear. It does look like the mayor of Manchester, Andy Burnham, is planning or at least proposing to run for MP.

We do have the incumbent in Manfield, Josh Simmons, who's stepping down to make room. And I think permission at the time of this record is permission from the NEC still pending. So, you know, obviously this is going to be a process, but it does seem that we are sort of moving towards a leadership challenge and certainly uncertainty remains quite high.

So something to keep an eye on. Now, you know, we've spoken about the process that is likely to unfold at length and in prior podcasts with James Naligan. And I think one thing to keep in mind here is that, you know, across scenarios that you look at, it's very unlikely that we're going to have clarity until at least September at the earliest, which is when the Labour Party conference is scheduled.

So this is going to be actually a pretty long run sort of process oriented thing. And in fact, if Andy Burnham does need to come in, there needs to be a by-election there as well. So this is likely to be a multi-month phenomenon.

Now, if I look at markets, both FX and having talked to a rate strategist as well, I don't think that there is much pricing to markets for any sort of adverse fiscal outcomes, even though we are seeing sort of headlines around yields making new highs, et cetera. I think if you look at, you know, just for the various drivers for both FX and rates, it does look like there isn't really much of a discount in either of the sterling markets at the moment. And as far as currencies are concerned, you know, I do think that there could be, you know, depending on how conditions unfold, you know, a knee-jerk sort of reaction weaker in sterling, more so, even more so than what we've seen so far.

But, you know, again, this is not going to be massive in size. Euro sterling going towards 88 to 89, we think will suffice. We also recognize that positioning in sterling is next short at about one and a half sigma or so.

So, you know, if you do get a couple of percent or so of sterling weakness on the back of this political uncertainty channel, I think people would more inclined be wanting to sort of unwind this position at that point in time, because for the simple reason that there is no firm timeline by which this needs to conclude. So, you're not going to hold on to something for a six-month period, some position for a six-month period on anticipation that something might happen in six months. And in reality, it might even take longer because the details on the fiscal are not actually going to be revealed to the actual budget itself, most likely in November.

So this is a long run process, near-term risks around sterling certainly negative. Do we think there's a long shelf life to this or that these are going to be very large discounts, more, you know, beyond one or two percent? Not really.

You know, I do think we get a knee jerk, weaker reaction. And then after that, a lot of the market sort of focus on this starts to fizzle out once we have the process that starts to unfold over a multi-month period. And meanwhile, let's just not forget that the data out of UK has a price to the upside.

So if you've got a six-month period to contend with with decent data, it's, you know, it will limit sterling losses. So bottom line, near-term certainly can see sterling underperform and weaken. But I wouldn't expect this to be sort of a persistent macro thing that lasts for six months on a whole.

So we'll stop there. Thank you very much for joining us today. And please take a look at our website if you want more details on our views.

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 May 15, 2026.