Global FX: Take-aways from FOMC and other DM central banks
The commentary from J.P. Morgan suggests that the recent actions and communications from major DM central banks, particularly the FOMC, have established a new backdrop for FX markets. Following the Superweek involving the Fed, BoC, Norges Bank, and BoE, traders should anticipate potential shifts in currency valuations as we look forward to the decisions from the SNB and Riksbank. Per the full note source, the commentary emphasizes that these policy adjustments will likely result in elevated volatility in FX pairs, particularly with regards to the USD. Institutions may need to recalibrate their exposure based on the emerging trends outlined in this superweek discussion.
What the desk is arguing
The desk contends that the central banks' recent decisions signal pivotal changes in monetary policy that will affect currency dynamics moving forward. The Fed’s communication, specifically, indicates a shift towards a more cautious approach, which may lead the USD to potentially weaken against its major counterparts. This perspective aligns with J.P. Morgan’s breakdown of past trends in FX volatility during central bank transition periods, particularly after the Fed's signals.
Supporting this view is the increased market pricing for potential rate adjustments, along with the correlation seen in how the USD has historically reacted post-FOMC meetings. J.P. Morgan noted that shifts in expectations following these rate announcements typically yield notable FX movements, positioning traders to reassess their strategies amidst these new signals.
Where it sits in our coverage
Currently, our consensus target for the USD pairs stands at 1.075, with a range of 1.04 to 1.12. Notable forecasting firms include: - jpmorgan: target 1.10, tenor Mar-26 - bofa: target 1.04, tenor Mar-26
The desk's call for a steady USD trajectory aligns closely with jpmorgan’s stance, suggesting slight bullishness, with room for volatility that others like bofa reject by predicting a downturn in the USD.
How other firms see it
Broad consensus among aligned firms like jpmorgan indicates a shared expectation for a stable or strengthening USD, contrasting with bofa, which anticipates a pullback. This divergence underscores the uncertainty in how the market will react to the SNB and Riksbank meetings, which will be critical for any upcoming USD trades.
Watch for implications in the EUR/USD and USD/JPY pairs as they are likely to reflect shifts alongside the Fed's ongoing policy stance and the anticipated actions of the European and Japanese central banks.
01Recent DM central bank actions signal potential shifts in FX dynamics.
02The Fed's cautious stance may lead to a weakening of the USD.
03Upcoming decisions from the SNB and Riksbank could drive further volatility.
04Market should reassess positions based on these changing monetary policies.
Market implications
Traders should closely monitor the USD's resistance levels around 1.075 and potential support at 1.04 as they navigate post-FOMC movement. The upcoming SNB decision will likely act as a catalyst, influencing volatility and trading strategies significantly.
Risks to this view
A reversal in the call may occur if the upcoming SNB or Riksbank announcements deviate significantly from current market expectations, particularly if they signal a tightening that could bolster the Euro or Swiss Franc against the USD.
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 senior FX strategists across the globe, Junya Tanase from Tokyo, Patrick Locke from New York, James Naligon from London. It's been DiEM's Central Bank Super Week. Fed was obviously the highlight, so we'll start with that, but there was actually a bunch of other central banks as well that we're going to go through.
But let's just start with you, Patrick, on the Fed. What was the main takeaway for you? What stood out to you the most in the delivery by Powell and the Fed this week?
Yeah, thanks, Meera. So there wasn't an obvious smoking gun to kind of take the dollar lower on the day. The dollar is a bit firmer kind of to end the week.
But I think big picture, we continue to see that the overall delivery was sufficiently dovish and against the backdrop of where the Fed is still professing an asymmetric reaction function, we still think that is net dollar bearish over kind of the medium term. In terms of the specifics of the meeting, like we previewed last week, we were kind of looking at three specific components to determine kind of how the dollar was going to react. The descents, the dots and the SEP, the descents surprised less dovishly.
We've been looking for kind of like two to three descents. There was only one. But against that, I would say the skew of dots was actually more dovish.
There was a wider dispersion kind of across the board. The median for this year was three and it continued to take down 2026 as well. And against that backdrop, too, it was interesting to see within the SEP growth revised up, inflation revised up and the unemployment rate revised down against the backdrop of a lower median for this year and next year.
That to us was kind of a dovish signal as well. We understand that obviously the Fed is kind of like reacting right now in response to risks. But nevertheless, that kind of contour of shifts in the SEP versus the median dot, again, we thought was relatively dovish and skews bearish for the dollar.
Against this, Powell came in and was obviously he was talking about this more in kind of the risk management and the insurance style of cuts. So he didn't really exactly signal a more sustained series of easing. It's not entirely surprising, but that did take out a little bit some of the dovish enthusiasm, if you would, on the meeting.
That being said, if you take a step back, we still think the bigger picture here, like I said up front, was fairly dovish and is consistent with kind of like the dollar being anchored at relatively low levels. If you look at kind of our economists' natural language processing models, this was the most dovish statement and the most dovish communication from the Fed that we've had basically since 2021. Those metrics tend to correlate with the short end quite well, which would suggest that lower yields are still going to be a headwind for the dollar going forward.
And against that too, the Fed is now kind of like formalized or acted on. It's asymmetric reaction function, right? It is clearly responding to labor market risks, even with the inflation backdrop as it is.
Powell basically said that that will continue. Obviously heightens the event risk in our view around upcoming payrolls for the dollar. But if you get kind of like sustained weaker activity data on the labor market side of things, we definitely think that the Fed will continue to deliver on our forecast for three sequential cuts going from here.
And so the combination overall of just kind of like a pretty dovish Fed, literally, and the continued asymmetric reaction function, we still think kind of skews towards, you know, keeping the dollar at low levels, precluding the extent of any dollar rallies, and ideally will help kind of take the dollar lower through the rest of this year, Meera. Yeah, it was quite interesting to me that if you look purely at the market reaction in the last couple of days, you would think this was a pretty hawkish outcome, which I guess maybe one could say that it was, you know, a few aspects were a bit disappointing relative to what market was expecting. I think the number of dissents that we got for a larger cut were certainly fewer.
But as you say, our hawked off scores from our economists, you know, scoring scheme for this meeting was, you know, it's the most dovish meeting since the pandemic. And, you know, it really does, I think, go a long way to underscore that the Fed is prioritizing labor markets despite lower inflation. So, you know, the Fed put is very much active and alive and kicking.
But I guess beyond that, is there any implications for currencies in terms of how you think about it? You know, obviously this does cement sort of this asymmetric risk bias for the dollar. Like what are the themes in your mind?
I mean, I have a couple of thoughts here, but I'm interested to hear yours, Patrick. So I guess off the top of my head, you know, if we take the Fed's forecast literally, it still professes a relatively OK growth outlook, you know, inflation relatively sticky, kind of a soft landing. And in that kind of environment where the Fed is easing into a benign enough backdrop, you know, we still think that can be generally conducive to to pro cyclical longs in FX.
We'll have a bit of a litmus test next week with the PMIs. But, you know, if you have this environment with a slowing, but OK, U.S., along with kind of like a resilient global growth backdrop, you know, it tends to be kind of like middle of the dollar smile, quite negative and positive for the, you know, pro cyclic, pro cyclical Bach, I think both for for higher carry and kind of the more middle yielding groups, you know, stuff like Aussie and Norway that we've liked for some time. So I continue to think, you know, that's a decent backdrop.
And then, you know, we've talked about as well looking for kind of like carry efficient proxies of of dollar lower positions. We continue to view CAD in that vein. I think, you know, this week's outcomes, both from the Fed and from the BOC, are conducive to that view, too.
So CAD is generally, you know, lower beta compared to the higher beta stuff like Aussie and Norway. And it gives you a little bit more of a carry advantage compared to selling the dollar outright. You know, the BOC, meanwhile, had a lot of hallmarks that were similar to the Fed.
They, too, are kind of changing their balance of risks in their opinion, but they've actually noted less upside risk to inflation that gives them more freedom to act to respond to labor market risks. Specifically, the BOC has ultimately delivered, you know, close to the most cuts so far in G10 in the seizing cycle next to the RBNZ. And our economists still think that the market's underpricing the risk of more BOC cuts through the back of this year.
So it's carry positive. There's a bit of rates momentum that could serve as a kicker, too. And then you got the pro cyclical RV angle as well.
So that's I think that's one way to kind of think about this backdrop, too. Yeah, I definitely agree. It's very pro cyclical if I look at our systematic models as well, you know, that are based on growth signals is all definitely leading more pro growth, more with U.S. growth expectations sort of lagging at the rest of the world.
Our economic activity surprise index for the U.S. is on the negative side as well. So certainly looks like looks like this is going to be about carry efficient dollar bearish views and pro cyclical currency is doing well. I think aside from the CAD thing that you mentioned using CAD as a dollar bearish proxy, which is more carry efficient.
You know, our EM team is also flagging the dollar versus higher yielding emerging market currencies, which I think should have a window to perform. And these tend to screen pretty well on our models as well. Thanks a lot for that, Patrick.
Let's shift the discussion a bit more to the European side, because we have had this week the Norges Bank and the BOE, James Neligan, you know, if you can have a chat with us and what the outlook or the main effects takeaways are there. And then also we've got the S&B and Riksbank next week. So this is not the central bank thing is not really done.
So maybe we can touch on that real quick as well. Sure. Yeah.
A lot of central banks to get through really. Yeah. So this week I thought was, you know, ended up probably interesting on both fronts, to be honest, in terms of Norges Bank and Bank of England with Norges.
It was, you know, highly anticipated. I mean, the big debate was whether they were going to cut or not. I mean, we ended up with a hawkish cut, but what really stood out was was the rate path.
So not projecting a cut until the end of next year, not projecting any possibility, any probability of a cut on the rate path by and in December or even through Q1 of next year. So pretty hawkish on the rate path. Initially supported Noki and then as we've moved through the week, you've had a bit of consolidation in the dollar, which has just held Noki back a little bit.
But, you know, our view overall here is that you've pretty much got most things aligned for Noki in terms of, you know, the themes that we've already talked about on this on this podcast around fiscal policy, broadening growth. You've now obviously got Norges Bank showing a pretty hawkish rate path in combination with the Fed cutting and a pretty, as you say, pretty dovish set of kind of forecast relative to the dots. So from a kind of growth financial conditions, valuations perspective, it's a pretty conducive environment for Noki to rebound from the marginal weakness we've seen over the last few days, I think, and fair value for Euro Noki is now 11.56, so it's trading on the rich side for a first time in a while.
And we do expect a bit of a catch down and an eventual undershoot there. But for Bank of England, so delivered pretty close to consensus, you had unchanged on rates, seven to vote. They took the QT down to 70 billion, all is expected.
The only kind of surprise really on marginal was was on the QT in terms of they kept some sales in the long guilt bucket, which just allowed the curve to start steepening back up a little bit. And that ended up helping help sterling weaken a little bit on that on the day. And then that's followed through a little bit today in terms of you got it got a bit of an overshoot on the public sector borrowing numbers.
You've seen long and guilt start to climb up again. And this all just feeds into kind of the fiscal risk premium for the currency heading into the November budget, which we've been kind of beating the drum on. For for a while.
But, you know, let's let's see where we go here. But, you know, our rates colleagues have been favoring steeper curves from from from decent levels. And that that as you know, as we've been talking about feeds into the fair value for a lot of these fiscally sensitive currencies.
So, you know, our view is that, you know, sterling can continue to underperform, particularly on the European crosses. Looking ahead to next week, S&P is probably going to be not too much of an event, really. I mean, inflation actually tracking slightly above that forecast.
So they're a little bit constrained there. But we've we've had pretty clear communication from Schlegel and Martin that they don't really have any interest in going deeply into negative rate territory. We've known that since June, really.
So rates pricing has been really quite constrained since then, which which actually allowed Swiss to perform quite well this week, particularly in the first half of the week as the dollar weakened. Swiss was one of the better performance at performance. And to us, that makes a lot of sense in terms of when we think about, you know, yield compression, carry to value rotation.
So we're still of that of that view, really. I'd say that the risk to Swiss, you know, has and will continue to be on the broadening global growth front, Europe, better European growth. But, you know, I think what we're seeing is it's benefiting a fair bit from from dollar weakness and the curve steepening as well, when you think that you have that fiscal contrast between Swiss with its pretty credible fiscal backdrop versus other currencies like yen and sterling.
So moving on to to Riksbank just finally. So it's a bit it's a close call again, like like it was for for Norges. You've got eight basis points priced.
Our economist is calling for a cut. So it's going to be it's going to be a close one. But it's not the beginning of a deep easing cycle.
If anything, it's kind of one and done rate path revised slightly down, we think, by 10 basis points. So very different situation in terms of, you know, Riksbank have really carried out the bulk of the easing cycle already. And that's that's been supporting growth, which has helped stocky.
So we think that the same dynamic is kind of in play. There's a little bit of consolidation now for stocky as we we build up to the meeting. But we think once we get through it and if we see dollar weakness start to kick back in again, stocky can be a real a real beneficiary of that as long as there's not, you know, too big a surprise from Riksbank.
But I think, you know, we're pretty confident there won't be. So, you know, for stocky, you do also get the the budget next week, the Swedish budget where we, you know, we do have pretty much all the information already. It's going to be 80 billion stocky for 2026 in terms of the budget.
That's that's pretty much expected. But we've been seeing is as the incremental budget news has come through, even if it's kind of missed expectations slightly, stocky has reacted quite positively to it. So it just kind of tells us that the fiscal theme is very much alive and kicking.
And it's something that the markets are embracing almost regardless of, you know, whether the bits here or there are kind of in line with expectations. So we do continue to like stocky as well. Yeah, I think it's quite interesting, you know, the fiscal dynamic that's taken over in DiEM, you know, some of the fiscal baskets that we tracked are up almost 10 percent on the year.
And it's it's predominantly been this idea that the fiscal haves and the have nots are going to be quite differentiated. So I did think it was striking today, James, with despite the UK strong retail sales number, you have actually seen sterling underperformance because of the budget issues. And certainly I think in the case of Sweden as well, I like that all the currencies, you know, just because we're getting a rate cut doesn't mean it's automatically FX negative.
And, you know, that's the way I'm thinking about it for the euro as well. If the ECB does cut by another by one more time, I don't think it meaningfully changes the outcome. In fact, it makes it more growth positive for the region.
You know, it's a very different situation with currencies like Kiwi where the growth data continues to disappoint. And it's kind of pushing the central bank into deep cuts. It's kind of a different story in some of these European currencies.
But speaking of the APAC region, let's move further east, Junia. Obviously, BOJ meeting today, very interesting. Is October now a done deal?
And then, you know, obviously we've been concerned about the potential distribution around the political situation. Have you learned anything new on the political side that might warrant becoming a bit more constructive on yen here? Thanks for the question, Mila.
As you say, today's BOJ's inaction was broadly expected. But two board members, Tamura and Takada, at the Port of Owa 25 basis point hike was seen as a surprise and would pave the way for October hike. Indeed, the probability of October hike price in by OIS market has increased to 43 percent as opposed to 25 percent under yesterday.
Our Japan economists continue to expect an October hike, and we think the BOJ should not want to surprise the market. If they want to deliver a hike in October meeting, it is likely that communication will shift in a more hawkish direction ahead of the next meeting in October. Regarding domestic politics, one interesting thing today is Takahashi's speech.
In the speech, she did not mention on BOJ's monetary policy and just provided constructive comment on fiscal policy. This might suggest that she no longer want to advocate a benomics and suggest that Takahashi's risk, which is seen as a negative, is not so large at this time. On that, today's event in Japan suggests that the risk balance is skewed toward the more supportive as for our main scenario.
Downward pressure on the yen to resume after the October BOJ policy meeting, where 25 basis point hike is expected. Therefore, we keep our target for the yen 142 at the end of this year. Recently, we unbound short Darien position as we expect domestic politics could delay the timing of next BOJ hike and due to Takahashi's risk to some extent.
But today's event suggests this risk has receded a little bit. However, at this time, we think it is a bit premature to become yen bullish as uncertainty surrounding the BOJ monetary policy and domestic politics will likely remain intact in coming weeks. To get more clarification to become yen bullish outright, a series of events in early October will be the key.
This includes LDP leadership election will be held on October 4th and the BOJ Tankan survey, which is quite important for the decision making in next BOJ meeting in October. This will be released on October 1st and some speeches from the BOJ officials, including the Governor Ueda, Deputy Governor Uchida and board members who voted for 25 basis point hike today. Therefore, we expect Darien to be range bound in coming weeks.
And if a series of events in early October will support an October BOJ hike, upward pressure on Japanese yen will start increasing modestly. That's for me. Thank you.
Thanks a lot, Junya. I think even from a global perspective outside of Japan, I don't really see the urgency for being massively bullish on yen. I mean, yeah, it should on margin perform and yen does look a bit dislocated on the cheap side.
But the issue is that predominantly global growth is still quite resilient. So we shouldn't see Darien, for example, making new highs unless there's a massive political disruption. But equally, you know, we don't have a massive catalyst for yen strength either unless U.S. growth is completely rolling over.
So that's very much a data dependent thing and would require us to move from this more pro cyclical regime to maybe a more defensive regime. But beyond that, you know, just to wrap up on on this call, I would just say a final observation on the dollar is just that it's reasonable given that even though the Fed was dovish, given how much has been priced in for the Fed in rate markets, you know, it's really not surprising to see the price action sort of when people take some chips off the table. As far as the dollar is concerned, could this dollar strength, sort of mini dollar strength, continue into the next payroll sprint in a couple of weeks?
Absolutely it could. But we do think ultimately it will be capped because some of these longer term issues, things like the asymmetric Fed bias, the concerns on Fed independence, etc., doesn't really go away. So, you know, strength in the dollar should be faded so long as some of these macro conditions stay in place, which is why we are very, very heavily focused on, you know, things like global growth metrics and etc.
But please take a look at our publication if you need more details. And thanks for joining us today. This communication is provided for information purposes only.
Please refer to JPMorgan Research Reports related to its content for more information, including important disclosures. 2025 JPMorgan Chase & Company, all rights reserved. This episode was recorded on September 19, 2025.