Global FX: Systematic signals, payrolls/ shutdown, risks to EUR/USD, AI-FX links
The desk underscores a cautious and data-dependent outlook on the U.S. dollar, emphasizing the recent lower conviction surrounding its trajectory. Per the full note by J.P. Morgan, this reflects significant uncertainties driven by systematic trade signals, potential U.S. government shutdown risks, and forthcoming payroll data that could shape market sentiment. As the dollar faces headwinds, the implications for EUR/USD remain particularly sensitive, especially given the current spot rate at 1.1419. Institutional forecasts indicate a wide range of perspectives on the euro's performance going into 2026, which solidifies the ongoing debates in FX markets.
What the desk is arguing
The desk anticipates that the dollar's future path is increasingly intertwined with key data releases, particularly labor market figures as the U.S. government shutdown looms. The commentary from J.P. Morgan illustrates that these factors could lead to heightened volatility in the FX space, particularly in the EUR/USD pair as traders assess the balance of risks.
Support for the cautious stance on the dollar can be found in systematic trading signals indicating reduced conviction among traders. Notably, the EUR/USD pair's current spot at 1.1419 sits below many firms' mid-2026 projections, suggesting potential upside for the euro as estimates reflect a consensus range from 1.1200 to 1.2000 through to the end of the year.
The alternative read would suggest that stability in the U.S. labor market data could reinforce dollar strength, but this appears less likely given recent trends in the payroll data leading into the fall.
Where it sits in our coverage
Our current consensus target for EUR/USD shows a median projection of 1.1550 by December 2026, with target ranges among various firms that span from 1.1200 to 1.2500. Notably, firms such as jpmorgan, deutschebank, and morganstanley forecast targets within this range, with goldman aiming for 1.2100 by mid-year.
This view indicates a relatively bullish outlook for the euro against the dollar when juxtaposed against other forecasts that align closer to the lower bounds. Notably, J.P. Morgan's own forecast reflects similar optimism, positioning at 1.1800 for March 2026, signifying alignment with broader market expectations.
How other firms see it
Firms such as jpmorgan and deutschebank share a relatively bullish perspective on EUR/USD, suggesting a likely appreciation of the euro against the dollar as various macroeconomic factors unfold. Conversely, firms like bofa express caution, forecasting lower EUR/USD levels around 1.1240 to 1.1500 by the end of the year.
The notion that the EUR/USD trajectory is tied closely to ECB policy adjustments will be crucial, particularly as traders evaluate the ongoing discourse from policymakers. Additionally, movements in pairs such as USD/JPY or GBP/USD could provide further context and impact trading dynamics around the dollar's performance.
01The dollar's outlook remains uncertain, primarily influenced by systematic trade signals and upcoming key data.
02EUR/USD currently trades at 1.1419, with a consensus target ranging from 1.1200 to 1.2000 into 2026.
03Major firms like J.P. Morgan and Deutsche Bank exhibit bullish sentiment on the euro, contrasted sharply by BofA's conservative view.
Market implications
Traders should closely monitor the upcoming labor market data, which could lead to increased volatility in the EUR/USD pair, currently at 1.1419. Given the mixed signals from forecasts, positioning in EUR/USD ahead of potential shifts in U.S. economic indicators will be critical.
Risks to this view
Should the U.S. labor data exceed expectations or if a government shutdown is averted, the dollar could gain strength, undermining the current bearish sentiment on the currency. A decisive rebound in economic indicators could shift market dynamics rapidly.
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, senior FX strategists from different parts of the globe. So look, FX markets remain frustrating to say the least. I mean, we've had some pretty big upside surprises to U.S. data this week.
We've had a German IFO downside surprise and, you know, perhaps in some cases also like an escalation. We've had a few, if you will, on the geopolitical situation with Russia, at least more news headlines on that front. So overall, leaving us with a fairly, you know, sort of low conviction, low intensity environment.
We're, of course, incredibly dependent on the data. We are going into the payrolls report next week, but we've got quite a few things to discuss around that because it's not just the payrolls in the U.S., it's also the possibility of the U.S. coming shut down. So we'll be talking about that.
And then, of course, since we have Antonin on, we're going to be discussing the model results as well. But I think just to set the stage on the dollar side of things, I think it's fair to say we have moved into this lower intensity environment, incredibly data dependent, particularly on the U.S., because as we discussed last week, a lot had been priced in for Fed easing already. And the onus now lies on the data to deliver in accordance.
And the data has actually surprised to the upside. I think the delivered volatility that we get out of the Fed terminal rate and its rate through FX is going to be quite muted. The big picture macro backdrop is still very much conducive for dollar weakness.
It's, you know, the growth signals are cyclical. You do have this outlook that the fiscal in Germany is going to, you know, intensify in 4Q and 2026 as well. And, you know, of course, the payrolls number is going to be the key event.
So data dependent, but overall backdrop is still very much dollar bearish. You know, it's just, you know, the other theme that we had that could have delivered some high intensity dollar weakness as well, which was Fed independence, is also something that's a bit on the back foot, might take longer to play out with Bowman and Waller sort of, you know, banding together with the rest of the committee and not descending for the larger cards. So all of a sudden, you know, it's not like this theme has disappeared, but certainly it does feel like it might take longer to play out.
So that's telling us what would all conviction levels, and this is a lower intensity period, and it does depend to a large extent on how the U.S. data evolves. So with that in mind, let's think about how are we supposed to deal with this FX environment. So maybe Anton and I can start with you, and you can give us some inspiration from the models, you know, on the FX side of things.
So what are the models telling us? Is the conviction view, conviction levels high anywhere? And what's the most interesting signals to you if you're thinking about navigating currency markets going forward?
Sure, Meera. Well, it's going to be difficult to come incredibly inspired in this context, but let's try. So yeah, as you said, this is a lack of conviction on the macro side, but unfortunately, it's also something that we see in our systematic baskets.
Like for instance, I would say the main example is that we run various versions of momentum signals. It would typically involve fast-moving baskets that buy or sell the best currency every week based on the relative momentum indicator. And what we see is that the dispersion in these momentum indicators in FX has really plummeted, especially in G10.
So if we take a step back during the first part of the year, like we had, for instance, the relative equity momentum, which was a very strong driver of G10 currency. I mean, buying, selling systematically the currency based on the short-term relative performance of the local equity market, this led to double-digit return, this kind of basket in the first part of the year. But this was the case because the cross-market dispersion in equities was high due to tariff divergences.
But now the same dispersion is very much below historical averages. Another type of example would be commodity momentum. You can design a bespoke commodity momentum indicator for each currency using, for instance, a fast-moving term of trade.
But right now, the dispersion in those is also very low. So it's due to the low volatility in energy markets and the fact that all prices have been around trading in like the 65, 70 range for weeks now. In the same spirit, again, you can do relative gross momentum or relative rates momentum that baskets that track the divergences in short-term rates through FX and divergences in growth forecast of our economies, for instance.
And again, the dispersion in G10 on those is also below long-term averages. So ultimately, this character is an environment which is not favorable for RV trade and non-carry related macro trends in FX, I would say. So in that context, like market participants, it turned to FX carry, including EM currency more on global portfolio.
So when we look at a bit what those portfolios have done year to date, they eliminated the losses of April and now like the different global or EM carry portfolio, depending on the variation you run, should be around 5 to 10% up here today, cross-sectionally, I mean. The current issue we have with this carry trade is that it's not the same as pre-2024. It's working, but it's in the post-COVID era, simple risk-adjusted carry basket like that led to strong return because it was driven by something, by central bank divergences and high-yield dispersion.
In 2023, you could be paid around 11 to 12% on, I would say, a global carry basket of liquid currencies if you were buying, for instance, the five best against the five worst carry. Now it's only 7% and the recent rally of that strategy is quite cyclical, like the performance has been driven by cyclical component of high-yielders versus low-yielders, at least if you consider the vanilla implementation of those carry baskets without features to make the strategy more defensive. And so you see, really, the rising correlation of carry with S&P 500.
So a simple carry like that, as I just mentioned, should now be half the beta of S&P, more or less. It's also very correlated to some other popular trade right now, such as FX short vol, for instance. We made basic calculation and we find that the correlation right now should be around 0.7.
So it's a team which is working, but we remain very cautious on this because we think it offers a low diversification benefit and we see relatively low resilience if market conditions deteriorate. For G10, more specifically, we still think the central bank convergence should favor mid- to low-yielder, so we are not especially recommending carrying that space. So what other teams might still be working?
It's been here for quite some time now, but we still see that the basket based on external balances or fiscal still seem to deliver quite a bit. So I mean, more specifically, basket, which would buy in G10 surplus currencies versus deficit currencies, or which buy currencies with a strong fiscal stance versus weak fiscal stance, proxied via multiple metrics, so debt to GDP and NIP, overall budget balance. So this means in practical terms, more or less, Nordics and CHF against, depending on the implementation, the sterling, dollar, yen, and eventually Kiwi.
So those still seem to deliver, like you should be around 10% if you bought top two, bottom two, top three, bottom three baskets on those teams, but yeah, again, it's been here for quite some time. So that's all I can see for now, Meera, but overall, we're kind of matching the macro side and with a pretty low conviction. That's pretty depressing, Antonin, but thanks for that update.
I mean, it does seem like at least the growth signals are still suggesting we are in a pro-cyclical environment. What that means for the dollar, of course, usually it's dollar bearish, but whether that actually translates this time is something that remains to be seen. But with that, let's move to perhaps the US side of the equation here, Patrick, some key ventures coming up.
The US government shut down. Let's just talk through the dynamics of that and how that could impact the FX outlook. Also, payrolls, if we get it at all, any thoughts around the dollar on that front?
Yeah, sure, Meera. So, yeah, markets are reengaging with the prospects of a shutdown next week, which would be midnight on Tuesday, September 30th. You know, this has become kind of like an increasingly frequent event.
We haven't technically had a shutdown since 2018 into 2019, but nevertheless, you know, every couple of years these seem to, the risk seems to flare up and here we are again. You know, we have kind of like a standard operating framework for how to think about government shutdowns with respect to FX. And I'd say there's kind of like three principal ports of call in terms of like how we think about it.
The first is just like, you know, historically, our assessment, the dollar is not, you know, basically shutdowns are not generally a major driver of the dollar, especially when there's not a debt ceiling going on simultaneously. And in this instance, there is not a debt ceiling component. Second, I would say I think the assessment is generally that shutdowns do not have a very large economic impact, especially ones that are relatively short lived, due in no small part because, you know, a lot of the funding that tends to be suspended does ultimately get released once the government reopens.
And then third, I would say we do acknowledge that it can be important for markets in that some data might be withheld or not disseminated, as you kind of suggested. We'll get to that in a second. But, you know, at the at the present moment, the markets are looking for about a 70 percent likelihood that we are going to get shut down next week.
So this is once again coming to the fore, you know, for markets. So with this baseline that generally like it's not a major deal for the dollar, you know, I still would highlight two things from our side that's specific to this instance that I think markets will want to be paying attention to. First is that, you know, in the middle of this week, there was a new new memo that went out from the White House basically saying that, you know, for any for any departments that depend on discretionary funding where there is no alternatives instead of furloughing those employees, they might move to effectively permanently dismiss them.
So typically, you know, government workers are furloughed. They don't work for a few weeks, but they're still considered on the payroll and then they retain their jobs when the government reopens. There's a prospect that that might not happen in, again, select areas of various departments that are dependent on discretionary funding, not mandatory funding.
It's still unclear the extent and the breadth to which that this could actually, you know, really kind of hit. It's also probably to a certain extent, you know, a point of leverage to try and get to a continuing resolution by next week and try to avoid the shutdown altogether. But nevertheless, it's a new kind of like labor market risk that is unique to this shutdown episode and obviously in the context of a relatively weak labor market backdrop already.
So that's kind of like an interesting and interesting wrinkle here that we're considering. And it probably adds a little bit of downside risk to the dollar all else equal. The second I would just note is that, as you kind of alluded to, for the government to shut down, it seems highly possible that the Bureau of Labor Statistics might not be able to release non-farm payrolls data next Friday.
As you say, we're obviously in a highly data dependent kind of circumstance right now. The weakening in the labor market year to date has been kind of a prime motivating factor of the asymmetric reaction function. And so effectively going dark on that particular data set would be problematic, obviously, for a number of reasons.
And then on top of that, depending on the potential extent of the length of any any kind of slowdown or shutdown, that might also affect the BLS CPI dissemination, which also matters, obviously, given kind of like the two sided risks that the Fed is generally dealing with right now. And in the case of kind of like a really more extended shutdown could also impact the reference CPI upon which the TIPS market is dependent. We would refer you to our rates colleagues research for a deeper dive into that.
But, you know, certainly I think that's important in the shutdown in 2018, for example, the BLS was still funded anyway. So we were able to get the data releases. So not since 2013 that we really had an instance of of losing these key data.
And it's such just a critical juncture in terms of, you know, the early start of the Fed's easing cycle, the market trying to gauge labor market momentum. You know, it seems important that it would be a real loss if we weren't able to kind of get that information next week. But that's probably a good segue into payrolls itself.
And, you know, assuming that we do get the data, you know, we're again in a kind of an interesting juncture here. The Fed has delivered its first cut out of the four that we actually are expecting. As you say, we have suddenly had kind of like a better surge of of U.S. data lately.
U.S. terminals up about 28 basis points by my calculation from from September lows. And so I think people are really kind of looking forward to this release to determine, you know, whether we kind of troughed or hit kind of the lows in terms of jobs growth and our things to get better for here. Or is it really the case where the labor market in particular is quite weak and that will kind of like reentrench market expectations about cutting and should probably help reinvigorate, you know, the dollar down from here.
So that's kind of like how we're thinking about it into that, you know, looking at kind of like past releases for October, like September data. It looks to me like the October month for payrolls tends to be historically kind of on the soft side. But that, I would admit, is a little bit offset by the fact that we've had two upside surprises last year.
And I look back to the instance last year in twenty twenty four and I see a lot of similarities, to be frank, obviously a weakening labor market leading the Fed to deliver a 50 basis point cut last September. But then payrolls kind of a couple of weeks later on the first week of October was quite strong. And against the backdrop of dollar shorts, you know, you saw a bit of a squeeze there.
So certainly I think interesting in that respect. But, you know, at the end of the day, I think the demand, the demand outlook in the labor market here is softer than it was last year, whereas last year was more than a supply side driven unemployment rate move. So I think realistically, I think expectations for a still pretty low number, you know, are there from our side.
And if you do get kind of like that nominal twenty five K to fifty five, fifty K area that we're generally expecting, I think, you know, again, that can, I think, re-inspire the dollar, the dollar downside trade a little bit. And again, kind of like sponsor the pro cyclical block a little bit more by virtue of lower yields, but a growth signal that's not quite obviously rolling over. So that's kind of how we're thinking about payrolls into next week.
But, you know, Mira, I'll hand it back to you. Interested to get your take on on the euro dollar outlook. Obviously, we had a decent spill this week to one sixteen fifty, probably exacerbated by positioning on my metrics.
I've noted that euro dollar longs were pretty sticky. So how are you thinking about, you know, what's evolved this week? New information on things like geopolitical risk, weaker data.
You know, how are you thinking about euro dollar here? Thanks, Patrick, and I think I'm probably maybe, you know, a slightly different opinion on the payrolls, you know, but I think that you actually need a worsening relative to the twenty five to fifty headline number to actually look at a decent dollar response. I mean, I think overall, you know, as I outlined at the start of the column, a bit less comfortable with the euro dollar sort of upside targets in the sense that, you know, we are we do have a topside target of one twenty two.
You know, the medium term conditions, don't get me wrong, are all very much still in place. You know, the Fed's basically confirmed established bias and on a hocked up course, they were the most established they have been in the post covid era. But if I break down what the view is based on, you know, the one twenty two upside targets, it was equally split between U.S. moderation and the European fiscal.
You know, and that by my, you know, at least by my analysis is mostly in the price. What we need from here is either European data to improve, you know, materially and some of the fiscal spending that we've been waiting for to start to translate. We are certainly, you know, our economists are certainly expecting that in 4Q and in twenty twenty six as well.
But, you know, that sort of gives you a bit of a low intensity environment rather than this is like one concrete event that that gives you a break of the range. I think, you know, the Fed terminal rate, you know, if it stays in a range, you know, it has very little delivered volatility around it. It doesn't really move the needle much on euro dollar unless you get really a break, a proper break in the US data.
So that's really what we need to see. The Fed independent story was a smaller component of the euro dollar upside targets of one twenty two. But it does seem like it'll take longer to play out.
So a bit lower intensity as well. And then if you look at the Russia, Ukraine has the potential for ceasefire that added maybe two or three percent or something like that to that forecast. And I think that's that's probably where there is most potential to change.
I mean, this is an evolving situation, but clearly everybody's seen on the news reports that there are more escalations with Russia on multiple aspects. And, you know, am I worried about a firm payrolls next week giving you a three to five cent decline in euro dollar? Absolutely not.
But, you know, what you could get, you know, what I would be more worried about is an escalation because that would that could elicit that kind of response. So I think it's probably prudent to think of some sort of hedges against this outcome or at least sort of some some sort of risk reduction against the outcome, because we really don't know how this will evolve and it's possible it's not really going to escalate at all. But, you know, this is a space to watch the bottom line.
I'd say, you know, if you sort of set that risk aside, the medium term bias, the fundamentals are still very much to buy or learn dips. And the main markers for the view being U.S. and European data, European data more so on the fiscal side and then also the geopolitical developments. But but certainly a less comfortable situation than than back in July when we did break the range on the downside for a dollar.
I think the geopolitics was in a very different place. So we just have to recognize that this is a different environment that we're in. Thanks.
And maybe just to wrap up, you and your team have been doing some work on AI and the CapEx spend. Do you see any read through the effects there? You know, it's a it's a it's a tricky one.
I mean, everybody knows about it. Everybody knows the CapEx spend has surged. Our economists have certainly been talking about it.
It is linked with the AI and the tech parts of the economy. And if you if you take a look at sort of some of these indicators that track either investments or tech IP by country, what you find is that it's it throws up your usual suspects, which is obviously U.S. and some of these Asian countries, Taiwan, Singapore. Taiwan particularly stands out.
What is interesting to me is that I kind of dig a bit deeper and go beyond this. And, you know, Sweden and UK stood out incidentally. You know, these sectors are just a smaller portion of these economies.
So, you know, talking to our economists, it does feel like this is not really something that is going to be a game changer for the outlook for these for these countries. But, you know, you can kind of combine it with the fact that a lot of these are low yielding currencies, which would benefit in case you do get this sort of break in the U.S. data should benefit from this general environment in which current accounts, surplus countries, currencies are performing. It starts to give you more tailwinds relative to your peers.
I don't think it's a game changer on the DM currencies I mentioned, but it's perhaps just a small tailwind that that is a risk factor. That's what sort of monitoring and on the Asian side are, you know, Asia strategists have been making the point that this hasn't really quite translated to currency returns as well. So overall, I think what the takeaway here is that this is sort of a pro cyclical kind of environment.
It's being led by these specific sectors. And but, you know, should have sort of these pro cyclical implications for asset classes across across the spectrum and not just not just FX. So it does give you the sense that perhaps the high data currencies are going to continue to be in good shape.
And and maybe it's going to be the mid to low yielders that are participating in this dynamic that do better. Obviously, not not sort of anything groundbreaking, but still some interesting data in there. But let's let's wrap it up here.
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All rights reserved. This episode was recorded on September 26th, 2025.
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