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FX BANK FORECAST · COVERAGE
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Aggregated year-end forecasts, scenario shifts, and curated analyst notes from 30 institutional desks. No promotion.
FX BANK FORECAST · COVERAGE
Aggregated year-end forecasts, scenario shifts, and curated analyst notes from 30 institutional desks. No promotion.
The desk posits that the ongoing US-Iran conflict is exerting upward pressure on oil prices, which in turn is influencing central bank policies and the strength of the US dollar. Per the full note from J.P. Morgan, the recent hawkish stance from central banks could lead to a stronger dollar, but the relationship is not straightforward. The desk highlights that the dollar's trajectory is closely tied to geopolitical tensions and oil market dynamics. With no high-impact events on the calendar in the next month, traders should remain vigilant to shifts in oil prices and central bank communications.
J.P. Morgan Global FX Strategists analyze the ongoing spillover of the US-Iran conflict into currency markets, noting that geopolitical tensions are influencing the dollar. They also examine recent hawkish central bank meetings and debate whether rate hikes necessarily support currency strength, suggesting that the relationship may not be straightforward.
This aligns with our consensus view that geopolitics and central bank policy divergence are key FX drivers. Our firm spread likely reflects a cautious bullish bias on safe-haven currencies (USD, JPY) amid tensions, while questioning the sustainability of carry trades in a rising rate environment.
No other firms are cited in this source. Generally, other banks like Goldman Sachs and Barclays have similar views on near-term USD support from geopolitics but diverge on the impact of rate hikes, with some arguing higher rates can boost currencies if they signal economic strength.
Key takeaways
Market implications
Geopolitical risk could keep the dollar bid in the near term, while hawkish central bank surprises may lead to currency gains only if accompanied by strong growth outlooks. Markets should watch for shifts in safe-haven flows.
Risks to this view
Escalation of US-Iran conflict could trigger a sharp risk-off move, boosting JPY and CHF. Alternatively, successful de-escalation could unwind dollar gains. Also, if central bank hikes are seen as policy errors, currencies could weaken.
Hello, and welcome to this week's At Any Rate podcast. My name is Pat Locke from the Global FX Strategy team, and with me today is Arindam Tendilya, James Neligan, and Octavia Popescu. What a week.
Markets are still obviously very preoccupied with the Iran situation. Felt like there was more bad news than good news to me personally this week, and obviously we did revisit 120 in Brent before we're tracing. I think that the market is coming around to this idea of framing the spillover impact into this kind of matrix of price times duration, and the idea that the global economy can really potentially hold in if Brent kind of like doesn't eclipse the 125 level, but less obviously above that, the recession risk coming a little bit more obviously, especially if that price is persistent.
And I'd say this week added layers of complexity, given the more kind of outsized moves in gas specifically, and considering that gas has a little bit more of a region-specific impact than kind of the global oil market shock. You know, taking all that together, you could maybe argue the dollar's performance this week was a bit underwhelming, but again, that's in the context of really an exceptionally noisy and volatile week all around, probably otherwise highlighted by JP Morgan adopting hiking calls for both the ECB and the BOE. That's a pretty amazing turnaround in just a number of weeks.
We'll definitely dig into that with James. But not surprisingly, you've kind of like added some really pretty extreme rates volatility, especially kind of in the UK markets this week. But even against that, it's kind of hard to ignore FX's relative stability compared to the race fall.
I would maybe put that down a little bit to the rise in break-evens, offsetting some of the move in nominals, so you didn't get much real yield volatility per se. And obviously for a while, including we discussed last week on this podcast, we're also a little bit preoccupied about the growth implications of aggressively hiking rates into an energy purchasing power squeeze. So all that taken together, it feels like it's a little bit of a one-way train in rates, a little bit less obvious for FX.
And so before digging in a little bit more into the BOE and the ECB specifically, and what that means for those currencies, Arindam, I'd like to turn it to you. Interested in kind of just your broader take on macro markets right now, where do you think we're going from here? How do you think the Iran situation is evolving?
And what does this ultimately mean for the dollar, you know, from your perspective? Yeah, Pat, yeah. So almost everything you said in your intro resonated with me.
I'll make three short points. The first is, you know, we have seen $120 Brent in this in the cycle since the conflict broke initially in the during the deleveraging shock, I think it was week one. But this week felt like the first week since the war began that markets as well as policymakers properly grappled with the idea of more lasting damage to the global economy from a more protracted conflict, which is kind of in line with our thesis that we laid out last week when we turned tactically bullish dollars, that time is not your friend in this situation.
And every day that you get closer to physical outages or shortages or, you know, just limited oil and gas reserves thinning out is a day closer to having to make unpalatable policy choices. And I suppose Western European policymakers did take some steps in that direction, as I'm sure James will discuss at more length. Which brings me to my second and related point, that this was another week of higher bond deals and net lower equity prices.
Nothing disruptive on the equity side, mind you, VIX is still holding below 30, but that combination is another step towards this stagflationary quagmire that, you know, financial markets may have thought they'd put to bed in 2022. So as you said, inflation break-evens continue to climb, there's a wedge that's now being driven between real and nominal rates. Risk parity portfolios leak lower on the week.
So many people have pointed out, justifiably so, that 26 is not 22. But it seems to me like we are slowly but surely beginning to move in that direction in terms of price action, which makes it doubly odd to me that we haven't seen a bounce in the dollar, given that you tend to run out of portfolio hedges in that sort of an environment and the dollar is one of the very few left. Especially so in a week when the other major defensive asset, i.e. gold, absolutely took it on the chain.
So as you said, it's very noisy. Not sure we could explain that price action with our models. And third, sort of a lesser macro and more micro observation, less so in G10FX, more so in EM, especially oil importing EMs, many of which are in my neck of the woods.
Dollar risk reversals continue to make new highs in option markets. So there's a curious disconnect starting to open up between the relatively muted cash market reactions and more anxious option markets. And you go back and look at history, what you see in terms of a pattern is once riskies get to some chart highs, call it two sigma over a couple of years of look back, spot does tend to play catch up to options.
Time will tell whether that pattern holds up this time around. Yeah, very good. Thanks Arindam.
You know, a lot of reasons to think that the dollar should be benefiting in a higher oil environment, especially when gas is squeezing, you know, other specific reasons, more so outside of North America. So yeah, I'm still pretty comfortable thinking that the dollar can kind of continue up from here. But James, let's turn to you again.
BOE, ECB, major rates fall. We're looking for hikes in April. But sterling wasn't obviously an outperformer yesterday, despite 30 basis points on the short end. 10 basis points follow on today, cables up only a percent and kind of more flat against other crosses.
I mean, how are you thinking about this, both for euro, for sterling and for the region as a whole? Yeah, for sure. Thanks.
Thanks, Patrick. You know, as you say that sterling not quite keeping pace with the hawkish repricing. I think I think that itself is a bit of a manifestation of the stagflationary reaction function that we were talking about on this podcast last week.
I'll start with the Bank of England. That was definitely the most hawkish meeting on the week. We got a 9-0 on the vote.
We were looking for 7-2. So just obviously, it was a complete hawkish pivot from the Bank of England. I mean, you even had the likes of DINGRA, you know, kind of uber dove discussing the possibility of hikes in the minutes.
But the minutes did also mention the idea that this energy shock could lead to a more rapid rise in unemployment, which is, you know, clearly a stagflationary outcome there. And we think, you know, help to kind of take the edge off of some of the bounce in sterling. And as you say, we're now calling for multiple hikes from the Bank of England.
You know, I think there will be some in the market that are attempting to look at the carry in sterling. But I think just as you say that the nature of this supply shock, you know, clearly reflects some growth risks that you have to offset against that. You know, our view more recently has been centered more around cable.
I think the bearish view there gets a little bit of help from the Fed as well this week. And I think it's probably easier to have a bearish view on sterling versus the dollar than on other crosses. But as you say, I think this divergence between real and nominal rate spreads is really key.
And that itself is a reflection of the stagflationary outlook. And it's really real rate spreads that you should be gearing off. And I think, you know, there'll be plenty of debate around sterling.
And we do side on the more, you know, the bearish side of things tactically. But there is a mix potentially coming down the line here in a couple of months time where you potentially have, you know, the political uncertainty coming in with the local elections, the energy supply shock manifesting, Bank of England tightening and the labor market weakening at the same time. And you know that it's a pretty nasty mix for sterling.
So, you know, we can argue the short term. But I think, you know, in terms of the summer and the autumn, I'm definitely getting a little bit more worried about sterling here. Moving on to euro and the ECB, you know, I think initially they seemed to strike a bit more of a balanced tone.
Well, Lagarde definitely tried to in the press conference. The forecasts were a little bit more, you know, edging towards the idea of policy tightening. So you saw, you know, core inflation come up two tenths in 27 versus growth forecast based, you know, essentially remaining unchanged around that time.
So that, you know, you could argue had had the tightening baked in. And obviously, we have obviously shifted towards to multiple hike forecast for the ECB as well now. So, you know, a hawkish statement, hawkish forecasts.
And then you had the release of these scenario projections after the press conference where they have an adverse scenario where headline inflation gets, you know, towards 4% and that's more severe scenario for the geopolitics where, you know, inflation could get maybe get up to even 6%. So, you know, that that itself had a hawk, a real hawkish lean as well. And then that that set of documentation did flag the possibility of a hike in April.
And that, I think, accelerated some of the kind of bear flattening that we'd seen in the rates curves. And, you know, we're taking a similar take on this to what we took with Sterling in the sense that it's, you know, it's not helping the cyclical picture in Europe. It's exacerbating the energy shock.
And as Arindam was saying, you can see that manifesting in the way risk parity portfolios have traded. You can also see it in other kinds of equity internals. If you look at yields versus cyclical defensives and things like that.
So we still quite like this dollar versus energy and energy importer story that we've been pushing. And that includes Euro and Sterling. Very good.
Thanks, James. And, yeah, you know, you mentioned the Fed not obviously as quote unquote hawkish as these other guys, but certainly enough kind of uncertainty flagged from the D.C. side. So as for the market to take out, you know, some of those residual cuts priced in for this year.
So looking pretty flat now. So the bear flattening you mentioned, obviously, still here, too. But Z6, Z7 now looking kind of like 30 basis points inverted, which is pretty extreme.
But bigger picture, I mean, it's still interesting, obviously, that, you know, over a two year forward looking horizon, U.S. rates still kind of like inflect lower, whereas the broader G10 complex is basically all priced for hikes, more or less. So there is still some dichotomy there. Maybe it's consternation around the U.S. labor market, the Warsh effect, what have you.
But there's still a pretty decent chasm there and remains to be seen whether and whether that can really kind of persist into the future. But Octavia, looping you in just to kind of wrap up the euro side, a little less fanfare, but we also have the Riksbank and the SMB, what were your key takeaways there and anything key for the FX here? Hey, Pat, thanks.
Yeah, for the Riksbank and Stokke, there's two points I would make. First, I'd say that the general backdrop of the, you know, the universal hawkish shift by other central banks in the face of the supply shock is already a bad environment for Stokke in particular, considering, you know, its low yield, the beta to risk markets, the rate sensitive economy and housing market, and what was already disappointing growth momentum even before the supply shock. And so all of these mean that even if the Riksbank did keep up, which our economists don't expect, the currency would not be able to fully benefit from that.
And second, the meeting itself was quite balanced in tone, but it overall supports the view that of using Stokke as a funder and that it can underperform other high beta like Aussie and Noki, but also dollar in this environment. And now, while our economists are looking for BOE and ECB hikes, they're not expecting that for the Riksbank, considering the ex-ante downside risk to inflation that we had already before. And because even in the scenario analysis where they had a sustained straight closure scenario, which led to hikes that assumed no recession, in which our economists called debatable as well.
So they are looking for them to lag in any case. For the S&P, there wasn't a material increase in pushback against currency strength relative to the statement from two weeks ago. So they reiterated their increased willingness and preparedness to intervene.
So that wasn't new. What was new was an addition that the S&P counters a rapid and excessive appreciation, which would jeopardize price stability. But ultimately, this just confirms what we've been thinking that the S&P may intervene to slow down sharp rallies in the franc, but not defend a certain level.
And we think that for them to sustainably be able to weaken the franc, they would likely have to commit to actually return to a regime of sustained Swiss sales that are upsetting the supportive balance of payments, which is currently not the case. And we saw that at the meeting yesterday as well. Euro-Swiss rallied on a headline that negative rates have become more likely, which then proved incorrect and was retracted, but the pair didn't retrace, which was likely in part due to the BOE and ECB's hawkish deliveries later in the day.
But we'd be more minded to fade this post S&P-Swiss weakness, because if we look back in 2022 as well, we saw that the growth implications of bad hikes mattered much more for the pair than the rates themselves. So that's something we're keeping in mind as well. Cool.
Thanks, Octavia. I mean, certainly on the Sweden side, it seems like a lot of domestic reasons to be pretty tactically bearish. So I think that that makes sense to me.
Arunam, pulling you in one more time, just to wrap up Central Bank's super week. Give us your thoughts on the BOJ and the RBA, please. Yeah, sure.
So RBA. Tight call. We were looking for a hold, but got a 25 basis point hike in the end.
Split vote 5-4. Certainly exceeded market expectations going into the meeting, which was around 18 basis points. So the decision was framed as a risk management move in the face of inflation pressures.
Team Sydney is holding on to their call for a May hike. But what's interesting to me is that the market has taken down implied odds of another hike in May as things become more sensitive to the tightening of financial conditions that is beginning to feed back into growth. Right.
So for me, the interesting observation was that despite it nominally beating what was priced in going into the meeting, Aussie did not rally in any notable way thereafter. The governor actually explicitly came out and said that she does not wish to exacerbate the tightening in financial conditions that is in train, which suggests to me that even though these external reasons, the carry, the terms of trade, the angles to our Aussie bullishness are still intact, the domestic underpinnings are starting to wobble a little bit. And we're still constructive Aussie on an RBA basis versus Western Europe ex-Norway.
But I think that this insensitivity of both Aussie rates and FX to domestic data needs to be watched more closely from here. And finally on the BOJ, and if you had asked me at the start of the week, Dolly Yen knocking on the door of 160, Brent Ford Skyrocket to 120 or close to midweek, global yields will rise, including a very punchy jump in front and dollar rates. And you have a BOJ MPM scheduled midweek, which has historically been dovish for the yen.
I'd almost certainly have guessed that we'd be through 160, perhaps maybe even closer to 162, gun to my head. And I'd be wholly and totally wrong, which is why I do this job. I thought this was one of Governor Wada's best press conference performances.
The terrain was tricky, the stakes were high. He could not pre-commit to April, nor could he ignore where Dolly Yen was. But in the end, his remarks around the underlying inflation trend being upward, the board at the margin being more concerned about inflation than growth at this stage, I think that ended up placating bond and FX markets.
The Tokyo view is that the April MPM is still alive and it's a go as far as a hike is concerned. But OIS pricing for April, pretty much unchanged since before the meeting, around 15 basis points and a Dolly Yen a smidge lower. And all in all, I think Governor Wada should be very pleased at having sidestepped what could have been a bit of a pothole for the yen.
Very clear. Thanks, Serendam. Thanks, James.
Octavia, I think we'll leave it here 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 Chasing Company All Rights Reserved. This episode was recorded on March 20th, 2026.
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