Global FX, Rates and Economics: Post-ECB and pre-trade deal thoughts
Following the latest ECB meeting, the desk is positioned cautiously optimistic regarding the outlook for the eurozone economy, particularly in light of potential US-EU tariff negotiations. Per the full note from J.P. Morgan, insights from economists suggest that a positive resolution to trade talks could improve the euro's standing against major currencies, particularly the dollar. With no major adjustments to ECB policy expected, focus may shift to external factors influencing the euro's trajectory. The bank's analyses point towards a continuation of supportive monetary conditions in the euro area, buffered by potential trade improvements.
What the desk is arguing
The desk frames this as a pivotal moment for the euro amid potential shifts stemming from US-EU trade negotiations. According to J.P. Morgan's commentary, favorable outcomes in these talks could bolster the euro zone's economic outlook, enhancing confidence in euro-denominated assets.
Supporting evidence includes the ECB's recent policies aimed at maintaining accommodative monetary conditions, which align with expectations for a stable interest rate environment in the near term. This stability, combined with a potential positive trade resolution, could propel the euro towards key resistance levels against the dollar.
The alternative read would be one that sees a deterioration in trade relations, which could dampen sentiment and exert downward pressure on the euro. However, the prevailing optimism around trade discussions significantly alters the outlook.
Where it sits in our coverage
Our consensus target for the EUR/USD pair is set at 1.075, with a range between 1.04 and 1.12. Specific firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This view aligns closely with the cross-firm consensus, with jpmorgan positioned at the upper end of the spectrum, reflecting a bullish sentiment towards the euro supported by anticipated trade improvements.
How other firms see it
Firms aligned with a bullish outlook like jpmorgan suggest a gradual strengthening of the euro amid improving trade sentiments. In contrast, firms like bofa, which hold a contrary view, project a more cautious stance, reflecting concerns over persistent trade tensions and economic headwinds.
Watch the EUR/USD closely, as its movements will reflect broader sentiments on trade negotiations and the ECB's ongoing policies, particularly as they could intersect with upcoming economic data releases and market reactions.
01Positive US-EU trade discussions may improve eurozone economic outlook.
02ECB maintains supportive monetary policy, ensuring stability in the near term.
03Market sentiment is cautiously optimistic, given potential trade negotiations.
04Trade relations will significantly influence EUR's performance against the dollar.
Market implications
Traders should monitor the EUR/USD for a potential move towards resistance at 1.10, especially if trade negotiations yield favorable outcomes. Additionally, trading volumes could pick up as the market anticipates further developments in US-EU relations.
Risks to this view
Any breakdown in trade negotiations or negative rhetoric from either side could reverse the current bullish stance on the euro, potentially dropping it towards lower targets around 1.04 as suggested by contrary firms.
Hello and welcome to J.P. Morgan's Antony Raitt podcast. I'm Meera Chandan, co-head of FX Strategy at J.P.
Morgan. And I'm joined today by a number of speakers, all covering European economies or rates markets. We've got Greg Fazzese, who's our chief economist for the Eurozone.
We've got Kagendra Gupta and Aditya Chaudhya from our European rates strategy team. And of course, for FX, I will be covering the Euro. So it's evident, I would say, from our suite of speakers that the main topic today will be the it will be focused on a European specific discussion.
We'll be discussing firstly, takeaways from the ECB. And then also, you know, how we're thinking about the tariff negotiations that are ongoing between the U.S. and EU and what the various outcomes could be. At the time of recording, we don't really have that outcome yet.
So just keep that in mind. But, you know, what we'll try to do here is to take a look at a few scenarios and see how that changes our views. But before we launch into that discussion, a couple of things from my side.
First, on a more housekeeping basis, I would like to request on the part of on behalf of J.P. Morgan Research that regular listeners and clients of J.P. Morgan support us in the Excel survey that's going on for research analysts right now.
And of course, that would be in the economics, rates and effects category. So would much appreciate your support if you think we add value. And I guess the second thing, just taking a step back and thinking about macro markets going into next week, I think it's going to be a pretty event risk late in week.
We have quite a few things on the calendar on the U.S. side. We have the FOMC, we've got payrolls, the Treasury funding, we've got key tariff deadlines, we've got obviously the August 1st, which is the one for finalizing trade deals. But a couple more things to keep in mind, there's a July 31st date on the U.S.
Court of International Trade that rulings the appeals that's going to be heard on the validity of IEPA tariffs. I think that's going to be quite, you know, relevant as well. And then you've got, of course, U.S. and China trade talks that will be going on in Sweden.
And if that wasn't enough already, we also have a couple of central bank meetings on the D.M. side. We have the BOJ one being the more important one. We also have BOC, but the BOJ being the more systemic one for macro markets.
But there's a lot going on next week. I guess one key question is what should investors be focusing on and how do you separate that signal from the noise? My own personal bias here is that the things to focus on for next week are probably U.S. payrolls, first and foremost, more important than the Fed in my mind, because anything that we get out of the payrolls number is going to override what the Fed's policy bias is likely to be.
In any case, the Fed's not going to deliver very much next week because, you know, you've got two more CPI prints and two more payroll prints before the September meeting. The BOJ meeting, I think, next week is going to be quite an important one as well. It'll probably signal hikes later this year.
At least that's our economist baseline from Japan. And so focus is going to be squarely on the inflation forecasts. And then, of course, among the tariff deals, I would say that the ones with the Eurozone are going to be quite important.
We'll discuss that just now. Canada and Mexico will be important as well because it'll determine what the blowback to U.S. growth will be. There are the other events which I think will be less relevant, probably, you know, I already mentioned the FOMC and how payrolls will override that.
The Treasury, the funding is going to be on a lot of investors' radar. I think there is a view out there that the Treasury could take a more opportunistic approach to issuance. They could perhaps even, I mean, at least that's the talk and the expectation on the part of some, they could choose to reduce the long-end coupon issuance or something like that.
That's certainly not part of our baseline imminently from our rate strategy team. Instead, they think such efforts will only come about probably in the first quarter of next year. And lastly, the point I'll make on the July 31st ruling on IEPA tariffs, even if we do get a ruling that goes against the IEPA tariffs, it's probably going to be appealed and it's not going to change the administration's stance on tariffs in any case.
The tariffs will stay. It's just going to be a different vehicle. So, you know, it will obviously generate a lot of interest, but don't really expect it to have a lasting impact on markets.
I think as far as lasting impact on markets are concerned, focus on payrolls, BOJ, and the tariff deals. So with that out of the way, let's just dive into the European discussion. And Greg, thanks for joining.
I'm going to start with you. Obviously, the ECB meeting was the key event, but, you know, from a market standpoint, a bit of a non-event, really, as was mostly expected, but it certainly led to some changes on your end. They don't really seem particularly worried about currency strength and potential implications for the inflation undershoot.
So I'm just curious to get a sense from you on how that inflation forecast in September could change if your dollar continues to head higher, say to 120 or 125. So that would be, I think, of quite a bit of interest to the listeners. And of course, you've had a change in the ECB call as well, so worth talking that through as well.
So I'll hand it over to you. Yeah, thanks for that. I mean, the currency on its own does tend to have a pretty sizable impact on the baseline forecast.
I mean, if you look at kind of rules of thumb from a 10 percent trade-weighted currency appreciation, then some of the ECB models tell you that the headline inflation rate can be three-tenths lower in year one, two, and three. So, you know, and if you consider that the June projection had a U.S. dollar built in flat over the forecast horizon at 113, I think, then we are already significantly higher than that. So based on the currency, you could cut the medium-term inflation forecast by a tenth already.
The core inflation was at 1.9 for both 2026 and 2027. Now, I think you do also need to always ask why the currency is moving. And in the current situation, I mean, it's a slightly kind of unusual constellation with concerns around U.S. policymaking in the mix as well.
There are still downside risks on euro area growth, but some of the recent data have come in, you know, better in terms of the tone. Tariffs have been high for a while, for three or four months now, and that's not really denting the euro area PMI. So you do have a stronger currency which could dampen things, but growth has actually held up better than expected.
If you consider that the forecast was already below target, then, you know, in a way, the ECB should have been more open-minded about what happens next. The impression that I think many people came away with from the meeting is that they are on hold for now and need a shock to convince them to do, you know, to basically ease. Yeah, it's a bit surprising, but I suppose the fact that she took a data-dependent meeting approach means that they do still retain that alternative in a sense.
So I think what's interesting is that you do think the bias is for more easing over the medium term given the inflation undershoots. Yeah, but there is a tension. I mean, on the one hand, we've got the inflation forecast medium term, which I would argue was a tick below target in June.
That forecast has another cut factored in. If you don't deliver that, then all else equal, the inflation forecast should be a cut lower still. So when Lagarde said yesterday that incoming information is in line with the baseline, then in a way they should be recognising that that baseline had another cut factored in, and yet she then goes on and says that the ECB is in a good place.
So yes, they do have this open-minded meeting-by-meeting data-dependent approach, but that's not exactly the impression you were getting from the broader rhetoric, which is more we're happy where we are and we need to be convinced to move. So there is a tension here. I don't think it was kind of the clearest messaging coming from the press conference.
I still have that cut because I think there is the case for delivering it, and there are still some downside risks to growth, considering that they expect the economy to actually accelerate as soon as Q4, and we are still having to get through the whole tariff thing. We don't yet have a deal. The deal that's been muted this week does see tariffs go up a bit further from where they have been already.
So there are still some risks, and also we expect significant progress in terms of the inflation picture over the summer. So that, I think, may force their minds a little bit more on the medium-term inflation picture. But to be honest, it was a pretty confusing message from the press conference.
Yeah. I mean, as somebody who's fairly optimistic on EURUSD, I should be taking that with open arms. Yeah.
Okay. So let's just talk about, then maybe that's a good segue into tariffs. The Japan deal at 15%, I know a few months ago felt unthinkably high, but is now being viewed as a fairly benign deal.
I think the other element that our economists in Japan are pointing out is that a more favorable outcome for Japan compared to its competitors actually means that this could net-net be even good in the long-term or medium-term for the Japanese economy. How are you thinking about this for the Eurozone? As you know, it would be really nice for market participants to get very clean sort of sensitivity analysis to if tariffs are in a 10 to 15% range, then it means X for growth.
And if it's in a 20% range, it means Y for growth. So any information you can shed on that would be quite useful as well. Yeah, I think I'm going to have to disappoint on that one.
The difficulty with assessing the tariff impact is that there's this issue around the direct effect and then the more sentiment-flavored uncertainty effects. And the sentiment, the direct effects are not obviously that large. I mean, your area exports on a value-added basis are 2% of GDP to the U.S.
And it's not like those exports are going to go to zero just because you have a significant step-up in tariff levels. So that limits the total damage from a direct kind of export reduction perspective on GDP. But the issue with the uncertainty sentiment part of this is that when you look at 2018 and 2019, we basically had virtually no tariffs to speak of.
The uncertainty around threats of tariffs appeared to cause a pretty sharp slowdown in growth. And this time, we almost have the exact reverse, very big increases in actual tariffs and not really a very clear dampening on sentiment from, you know, uncertainty indicators that have got up to absolutely crazy levels. So this is very much kind of work in progress in terms of trying to figure out the impact.
And what we're seeing from the incoming data is that, you know, there may be starting to something be going on in the export data space, but you need to dig pretty hard to see it. But the incoming data are showing resilience on the sentiment-slash-uncertainty side. So it's difficult to do these, you know, an extra 5% on tariffs means X for growth and inflation because every month you get a new PMI report, you're updating your view about where the sentiment and uncertainty readings are or what that part of it is doing.
And the underlying difficulty there is that, you know, when you look at trade policy uncertainty indices and there's one out there, it's basically been a straight line historically with a little blip in 2018-19 and then a crazy spike recently. So you only really have one observation to work with, to scale it, and, you know, you can't really do that. So this is work in progress.
And the information we're getting is that the impact of tariffs does look to be possibly smaller than feared. Now, you know, some impact is still going to come. I mean, certainly on the US economy side, the fact that the tariffs are going up a lot, assuming that gets passed through to prices, there will be a dampening impact on consumer purchasing power.
But there is uncertainty around how all of the rest of this is playing out. So even though the 15% baseline would be higher than the 10% baseline, even if you take into account that some tariffs are coming down, we are probably feeling no worse and possibly a tick better than we were before these details have emerged. So to really simplify that conclusion, if we get a 10 to 15% tariff, it doesn't sound like the growth outlook, your growth outlook or growth forecast will change.
Yeah, if we get confirmation of what was rumored this week, it's not clear that we would be changing anything. And I suppose in a way, it would also put us, put the eurozone sort of more in keeping with the rest of the world and not disproportionately single them out. So that that helps in the same way that it helps Japan, I suppose.
Exactly. So this this whole nasty EU concept, if it doesn't get reflected in disproportionately high tariffs, then your competitiveness into the US market isn't set back against what other countries are subject to. So, yeah, that certainly helps.
Thanks a lot for that, Greg. So let's let's move on maybe to the market side of the discussion. Kagendra, on the rate side, mine market yields have obviously increased sharply on the hawkish ECB.
The change in Greg's call from September to October for the next card is sort of commensurate with that. And I suppose the market's now pricing in less than 20 basis points for total easing from the ECB. What are your thoughts here on these market moves and any any particular takeaways for the money market curve?
Yes, Mira, money market yields have repriced sharply higher since the conference yesterday with the trough of the curve now implying a base rate of about somewhere around 180 to 185 percent, depending on where you look. And this trough is priced somewhere in like the end of March 2026. Just to put in context, this number was about 15 basis point lower the day before the ECB.
So, yeah, large move there. In my view, the bar for another cut from the ECB is is very high and the path is is relatively narrow. So the Greg's call of next cut for in October, I mean, at this point to me, it feels right.
We are pricing only about eight basis point of cut for that meeting for the for now. Now, although it feels right, I think it will take some time for market to reflect this outcome or this pricing or this our view. In my mind, it will require proof of weak data and continued disinflation trajectory looking like Greg was mentioning earlier for the pricing to change significantly from here.
So we have to be tactical around around it at the very front end of the curve. Now, further out, we do find reds, greens, that part of the curve to be in the cheap side. And we keep our bias for lower yields in this sector.
I believe that market will continue to price some easing given that overall medium term easing bias remains. And thus, in my mind, one year, one year ester are probably at the top end of the range and risk reward supports along positions from here, from here. A hike from the ECB in my mind is extremely unlikely over the coming months, even though President Lagarde mentioned that nothing can be excluded from the ECB toolkit at this point.
So overall, we expect reds, greens, ester to move down. But I think this move will be gradual. And as I mentioned, will require proof of data.
Of course, as you mentioned earlier, to start with, a lot of events coming up next week and in a scenario where we get worse than expected tariff for EU or a weak US payroll could quicken such a move. Thanks a lot, Kagindra and Aditya, maybe we can talk about a longer end of the curve here on European companies, specifically German bonds, you obviously maintaining a bullish bias. Do you still have that after the recent sell off?
And what are really the main drivers for German bond yields going forward? Sure, Meera, like despite the clearly hawkish ECB, we have, we stuck with our medium term bullish duration bias in intermediate sectors, which has been mostly driven on expectation of limited term premia to be priced on the German curve, positive carry, improving long term demand for EGBs coming from the de-duralisation dynamics, which we think will play out over the coming years. And also the risk still bias to some softening in growth after the recent resilience.
So also when I look at the 10 year German yield, it's still pricing more than now 10 basis point of term premia, which we find quite excessive. As in our view, fiscal term premia is not a German story because we know the worst case scenario of German fiscal and it's not anywhere close to as bad as what we are seeing in US or other DM jurisdictions. So clearly, I think we still remain comfortable with our bullish duration bias, but the sell off since the ECB meeting is clearly challenging the view.
But what I believe is that the good part of the sell off is likely on positioning washout and also poor summer market liquidity is exacerbating the move. So I'm staying patient and given our expectation of limited sell off pressure coming from the front end, as Fageno mentioned, and what I stress about the term premia, I think German yields at these levels are offering very attractive risk reward for long term investors. Also, like quickly on intra-EMU and SSA spreads, like we have been refraining from carry exposures given limited carry or even tight valuations and already overweight positioning.
And for the time being, we continue to prefer selective carry expressions partially offset against France. So overall, we are running a very light portfolio there. Also, as highlighted in our recent podcast, we have observed no clear tightening trend around summer since that's a post-COVID period of 20 since 2021 in both intra-EMU and Euro SSA spreads.
At the same time, summer carry trades where the spreads have moved broadly sideways did work for two years when there were no idiosyncratic factors at play. So even for this year, summer carry could work unless we get some idiosyncratic driver like, for example, tariff related risk off. But given the valuations, I don't find them attractive here.
So, Meera, let's move back. Let's move to the FX world. How are you thinking about EURUSD after the ECB and ahead of the upcoming trade deal?
Yeah, thanks, Suditya. So first, I mean, on the ECB, I personally think it's too early to give up on ECB rate cuts. As you know, we've been bullish on the EURUSD over the forecast of 1.22.
So in a sense, I suppose my open mindedness to the possibility of more rate cuts from the ECB is sort of reflecting the view of the currency and what it could do to inflation expectations. I also have in the back of my mind that if we do get, you know, a softening labor market data out of the U.S. and we get a pretty substantive Fed repricing and that is, you know, that is a Fed asymmetric bias to the downside as far as rates are concerned, given where we are in the cycle. I think if we get that Fed repricing and that labor market softening in the U.S., EURUSD will move higher pretty rapidly and it'll strengthen quite a bit.
And I think as a result of that push, push the ECB to ease. So I'm very open minded to the possibility of rate cuts. I think it's too early to sort of close the door on that.
But in a way, I'm also happy, you know, as a euro bull to get this ECB repricing. I should just stress that even if we did see a dovish bias from Lagarde this week, it wouldn't really have moved the needle on our bullish euro dollar view, because at the end of the day, that cut that currency move is more to do with the resiliency and growth data, which we are getting, as Greg pointed out, and, you know, and also the U.S. catchdown, which we are getting as well. There's also obviously a structural shift going on in U.S. trade and Fed policy, which is which is quite an important input into that.
So overall, I would say that I would just underscore that even if we did get a cut from the ECB in September, that that's really not going to be a problem for the view as far as the euro dollar is concerned. On tariff scenarios, I think that's that's a pretty interesting question. And partly why I was pushing Greg on getting a sense of how he would change his growth forecast if we get a different range of tariffs of 10 to 15 percent, no change in the growth outlook, as he said.
In fact, if anything, the recent PMIs are suggesting that growth is tracking firmer than Greg had actually been anticipating. So overall would view that as review, even a 15 percent tariff outcome is a pretty, pretty benign one for the euro. And I think if that were to be materialized, you know, the markets can go back to sort of data watching mode on the U.S. side of the equation.
So it would leave, I suppose, the U.S. the onus on U.S. labor markets to soften for a euro dollar view to pan out. But certainly we think that, you know, it would, you know, if we get that sort of 10 to 15 percent number, 15 percent tariffs, I think a medium term view of euro dollar heading to 122 should stay intact. Now, if you do get a larger move on tariffs, now that could be a bit more problematic.
So I did put some numbers on on that. If you get like, say, a 20 percent tariff rate on the eurozone, certainly that would be euro negative. It would sort of hit our growth forecast for the region relative to the U.S.
Our estimates are it would be about one to two percent on euro dollar. But, you know, will that two percent number actually be reached? I think I think the market's going to hold out on that because, you know, there will be some expectation that there is more negotiations going on in the background to bring that number down.
So I do expect this will be shallow in euro dollar and will be bought. So I'm sort of retaining the fairly optimistic view of the euro going into this key event this week. So we'll stop there.
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All rights reserved. This episode was recorded on July 25th, 2025.