The desk is increasingly bearish on sterling, citing heightened political risks and a deteriorating economic backdrop as the UK navigates the ongoing US-Iran conflict. Per the full note source, the desk emphasizes that energy importer currencies like the euro and sterling may underperform as the conflict persists, particularly in a stagflationary environment. This aligns with J.P. Morgan's view that carry strategies may perform well in high inflation, moderate growth scenarios, although they caution against unhealthy carry in currencies like sterling. With no high-impact events on the calendar, the focus remains on geopolitical developments and their implications for FX volatility.
What the desk is arguing
J.P. Morgan's FX strategists analyze the macro FX impact of the US-Iran conflict, focusing on volatility and systematic strategies. They do not offer explicit directional views or targets in this podcast summary.
Where it sits in our coverage
Our internal coverage does not include specific consensus or firm spread data for the currencies mentioned (none are explicitly cited). Hence, we cannot align or contrast this commentary with existing targets.
How other firms see it
No other firm stances are available as the source is from J.P. Morgan alone and no opposing views are provided.
Key takeaways
01The US-Iran conflict is a key driver for FX macro and volatility markets.
02Systematic FX strategies are being assessed in the context of geopolitical tensions.
03J.P. Morgan emphasizes that this communication is for informational purposes only.
Market implications
The podcast suggests heightened FX volatility related to geopolitical risk, but no specific trade implications are drawn.
Risks to this view
Geopolitical escalation could lead to sudden risk-off moves and sharp currency dislocations.
Welcome to the At Any Rate podcast. I'm James Nelligan from FX Strategy here in London. And I'm here today with Yadizlav Jankovic and Antonin Dallaire, also from FX Strategy.
So we're going to be discussing the main FX macro themes this week and what we think going forward. So a bit of a rollercoaster week this week in terms of the events. I mean, we came in on Monday to some pretty severe risk off and it was only really a social media post from Trump that ended up halting that.
And we saw some weakness in the commodity exporters in G10 FX, seemed to be a switch in beta there from commodity exporters focusing on terms of trade to then focusing on their equity beta, which seemed quite new relative to where we had been. And then on Wednesday, you know, I was feeling a little bit more optimistic because it felt like we had had a bit of a climb down from Iran on their negotiation conditions relative to what they had been saying previously. But then, of course, on Thursday, Trump seemed to very much play that down and the prospect of a deal seemed a lot dimmer.
And then, of course, he ended up extending his deadline to April 6th for those energy plant attacks. And as we stand today, we've come into the market not liking that very much in terms of the prospects of a deal across asset classes. So we go into the weekend, risks still on the kind of more binary side.
But our bias at this stage is that the longer the conflict goes on, the more energy importer currencies like euro, sterling, stocky, kiwi in G10 can underperform. This week, we're thinking about this idea that we have been talking about stagflation for some time now since the conflict broke out. But you look at what our economists are projecting now, it's more along the lines of a kind of high inflation, moderate growth type environment.
So historically, that's been pretty consistent with carry strategies doing reasonably well in FX. So, you know, we're kind of testing the waters on that. We're not subscribing to it in any way, shape or form just yet, but we're kind of doing the back test there and thinking about it.
What we'd say is, you know, there's healthy carry and there's unhealthy carry. And you know, look at the likes of Nokia, Aussie, where you have, you know, reasonable domestic backdrops, that's the healthy carry. And the unhealthy carry would be the likes of sterling where you have, you know, political risk upcoming.
I mean, it's a pretty potentially toxic mix for sterling, actually. We've got a potentially pro-inflationary policy mix from Angela Rayner by, say, May, June. That's separate to the energy shock, but is obviously going to have intertwining impacts.
A weakening labor market in the UK relative to the 2022 energy shock, where the labor market was actually quite tight. And of course, the stagflationary impact of Bank of England tightening. So we definitely say that our bearish bias for sterling, which we switched to two weeks ago, is increasing in conviction.
A few other observations, I mean, we've been trying to market where the energy importer FX is actually pricing growth. And along with cyclical assets, they actually look like they're pricing the PMI above current levels. And that's just a function of the pro-cyclical repricing that we saw prior to the Iran conflict.
And so, you know, obviously, I go back to the point, as long as the conflict goes on, these cyclical assets, including energy importer FX, you know, start to look like they're pricing growth too high. The commodity exporters, it feels a little bit different now that we had that switch in beta on Monday. So we did some backtesting around that.
And if you look at pairs like Noki Stokke, Euro-Aussie, you go back to the 2022 playbook, the Russia-Ukraine energy crisis, OK, initially when the conflict broke out, there was some terms of trade benefit for the exporters. But you know, from around March, April time, the equity market took over. And that's not too dissimilar from what we're seeing at the moment.
If you do a longer backtest, it looks like these pairs can actually withstand equity market drawdowns as long as terms of trade is moving the right way. But I think for Noki, we're turning a little bit, you know, we're still bullish, but we're turning, you know, we're a little bit more cautious in terms of let's wait for the weekend's events. You know, if we do see a breakdown in negotiations, then I'm not sure Noki would be paying as much attention to terms of trade.
We did, of course, get the Norges Bank this week, a very hawkish decision in terms of the rate path. We're now looking at probably a hike in May or June. You know, that's the story we've been pushing for some time.
Inflation's obviously been running above target, but you've also got an improvement in the flow picture, which we've been talking about for Noki and, you know, the support from terms of trade. And we know obviously we've been pushing this for quite some months now, but I think just right here, we're a little bit focused on and more focused on the equity beta. That's that's it from my side.
But let's let's turn to the vol side and bring Ladislav in. So where do we stand on vols here? You know, we've obviously we've had the escalation in geopolitics.
We've had risk off. We've seen central banks worrying about inflation. Are we anywhere close to the peak in vols here?
Yeah, thanks, James. Yeah, as you pointed out, quite a bit of the uncertainty in the markets, lots of stuff going on. Geopolitics basically doesn't make it any easier.
One thing that that really is helping with holding the vols at these elevated levels is this dollar centric price action that's keeping the dollar correlations high, dollar vols high. We start to see a little bit more of the spillovers from the equities in some of the high betas like Aussie, which is also helping with keeping those vols elevated and even trickling a little bit higher at this stage. Dollar skew is also pretty interesting.
It's actually managing still to extend a little bit higher. It is definitely on a slower pace, but still managing even from these elevated levels to kind of really move a little bit higher. Dollar up days definitely are helping with that kind of price action.
People are still looking for optionized dollar topside. But one thing to point out there is that spot vol core is kind of getting to the levels where potentially could be a little bit harder to sustain the current levels if they can't really try to go even further higher. So we're kind of looking carefully on if any tangible normalization news, because at these levels where we are right now, definitely noise is able to keep the both vols and skew pretty firm, but there is some potential vulnerability.
On the question of the vol peak, essentially we're starting to see some select cross vol consolidation, and that's been happening really in like very few pockets in the euro crosses. So one of these is euro BRL that we are watching. And again, like this firm dollar core is helping with just keeping the realized vol on the soft side on the crosses.
And that's what's been kind of starting to weigh on the vols pricing. And we did see on week to week basis euro BRL vols coming down by about one point, which is notable. We do think that there could be another two points of potential consolidation if the soft realized vol keeps being soft.
So that's like really one pocket to watch separate from this firm dollar vols. Euromax is another one, which is risk results are quite stretched there, especially when we compare them to the money vols, they are something like near the 15 year high. So definitely seems like could be in for some repricing lower.
So the bottom line here is that looking at the dollar vols, they do seem to be able to hold where they are right now, and they should be able to stay there if we keep getting these noisy headlines on the same frequency as we've been getting them. The cross vols and cross skew is essentially something where things are kind of behaving a little bit differently in some of those pockets, like a lot of times where things are a little bit more vulnerable. But yeah, I'll stop here with the vols and want to turn it over to Antonin on some of the systematic stuff.
So Antonin, so the potential inflation from the energy surge, assuming we get it, how does that affect the FX carry? And also, if any interesting things to point out on the systematic signals and strategies that you've been running? Yeah, sure, of course.
So obviously, short term, the situation remains quite fluid. It's a rollercoaster with oil volatility and world risk beta, as James said at the beginning. So as you said, energy prices have been high for a month now, and inflationary pressures are possible with central banks turning more cash across the board.
And it's important to remember that inflation is a strong driver of the FX carry factors, because central banks don't usually reply with the same magnitude and timing. So you end up with yield dispersion. Actually, inflation is more relevant than growth, because growth tends to matter for the carry factor when you enter a recessionary territory, when you have the shock and carry sort of collapse.
And moderating growth with higher inflation can lead to relatively strong carry outcomes, in fact. It's been sort of the case in 2022, even if the context was different, the FX carry out performed despite equities suffering from like the central bank or cash repricing at the time. For now, like I would say on the short term, our carry baskets are trading with broad risk direction now and the iron headline.
But medium term, this can evolve. If you look at G10 carry baskets specifically, you have more price in Nokia and Aussie, which are more like the high yielders than for like the next two, three months and the low yielders like Swiss and Yen, for instance. So yield dispersion is going to slightly increase mid-2026, at least if market pricing is realized.
And also an interesting element is that real carry factors are currently outperforming nominal carry factors for almost all portfolio G10, EM or global FX. As of mid this week, our benchmark real carry factor in EM was actually up 5% year to date. And it's something that we see sometimes at early stages of inflationary potential developments like real carry baskets to better than nominal carry baskets.
So just to conclude on that carry thing is like, if we see like the dust settling a bit on the iron tension, like the higher inflation and like hikes could mean like attractive carry again. If I move a bit more to like the signals in general and the strategy, I would say first, most of our signals currently point towards dollar strength. If we look at our gross momentum signals that we run across 28 countries, they have started to turn a bit more negative across the board, which is usually considered a good counter cyclical signal for long dollar.
For more on more like relative stance, also our signals are quite strong for the dollar in terms of gross momentum versus the rest of the world, commodity term of trade momentum versus other countries as well, and decent carry level. Obviously, we remain aware that the dollar outcome is likely binary based on the iron development and the state of our moves. But just on those metrics, at least it's quite strong.
Obviously, on the other hand, euro screens generally weak on the exact same set of metric. And as flagged earlier this week by our macro team, like euro dollar at 115-ish, screen's quite dislocated from real yield differential and term of trade differential. So the fair value seems generally lower.
Regarding more like the type of strategies and thematic FX basket that we run, we can say since the beginning of the conflict, as I mentioned previously, real carry FX basket have generally traded well for all portfolio. Other interesting baskets have been like a sort of commodity momentum basket built for FX via the trajectories of term of trade. It's been doing really well in G10 year to date, it's up three to four percent, but not necessarily in EM, because certain EM currencies are trading a bit better than what their term of trade would have implied on this energy shock, especially in Asia.
And finally, just to mention, because we talked about this a lot last year, we were talking about FX fiscal baskets. So baskets which are generally long currency with like a strong fiscal stance versus weak fiscal stance. It's not like the focus of the market right now, but because it was very like important team, I just wanted to flag that those have been generally slightly negatively correlated with oil prices.
So they are generally down now two percent from their peak, which was a couple of months ago. And yeah, that's all for me on like the strategies and signal side. Okay, thanks, guys.
We'll leave it there for this week. This communication is provided for information purposes only. Please refer to J.P.
Morgan Research Reports related to its content for more information, including important disclosures, 2026 J.P. Morgan Chase and Company, all rights reserved. This episode was recorded on March 27th, 2026.