Global Rates: Cross currency basis 1H26 outlook
Lead — The desk anticipates a tightening of the €STR/SOFR cross currency basis in the first half of 2026, driven by the interplay of European and U.S. monetary policies. Per the full note from J.P. Morgan, the speakers highlight that the basis is influenced by the ECB's potential rate adjustments and the Fed's ongoing stance on interest rates. Current positioning indicates a consensus among traders that the euro may strengthen against the dollar, with a current spot of 1.1700. This is further supported by the broader market outlook, which sees a gradual upward trend in EUR/USD as we approach mid-2026.
What the desk is arguing
The desk frames this as a pivotal moment for the €STR/SOFR cross currency basis, suggesting that upcoming ECB policy shifts could lead to a more pronounced tightening. The discussion by J.P. Morgan's Gupta and Ozil underscores the potential for a narrowing basis as the market adjusts to anticipated changes in interest rates on both sides of the Atlantic.
Supporting this view, the current consensus among institutional traders indicates a gradual appreciation of the euro against the dollar, with a median target of 1.1750 for March 2026. This aligns with expectations of a more hawkish ECB stance, which could further compress the basis.
Where it sits in our coverage
Our internal coverage shows a current spot for EUR/USD at 1.1700, with a consensus target of 1.1750 for March 2026, ranging from 1.1300 to 1.2000. Notably, jpmorgan has set a target of 1.1800 for March 2026, while ubs is slightly more bullish at 1.2000.
This view aligns closely with the broader market consensus, as the desk's target sits within the upper half of the range, indicating a bullish sentiment towards the euro in the near term.
How other firms see it
Aligned firms such as jpmorgan and ubs share a positive outlook on the euro, forecasting targets of 1.1800 and 1.2000 respectively for March 2026. In contrast, firms like citi and stanchart express a more cautious stance, with targets as low as 1.1300 and 1.1400, reflecting a divergence in expectations regarding the euro's strength.
The trajectory of EUR/USD is closely tied to the anticipated actions of the ECB and the Fed, making the upcoming monetary policy meetings critical for shaping market sentiment. Traders should also monitor the USD/JPY pair for potential spillover effects from these developments.
Key takeaways
- 01The desk expects a tightening of the €STR/SOFR cross currency basis in H1 2026.
- 02Current consensus targets for EUR/USD indicate a bullish outlook, with a median of 1.1750 for March 2026.
- 03J.P. Morgan's analysis highlights the influence of ECB and Fed policies on the cross currency basis.
- 04Divergence in targets among firms suggests varying expectations on euro strength.
Market implications
Watch for EUR/USD to approach the 1.1750 target as market sentiment shifts in response to ECB policy signals. The upcoming ECB meeting will be a key catalyst for determining the trajectory of the euro against the dollar.
Risks to this view
Risks include unexpected shifts in central bank rhetoric, geopolitical events affecting funding flows, and regulatory changes impacting bank balance sheet capacity for FX swaps.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2027 |
|---|---|---|
Goldman Sachs | Bearish | 1.1200 |
UOB | Neutral | 1.1450 |
Citi | Bearish | 1.1000 |
Hi, and welcome to At Any Rate, J.P. Morgan's global research podcast, where we take a look at some of the drivers behind the biggest trends and themes across fixed income currencies and commodity markets. I am Kagendra Gupta, head of European Interest Rate Derivative Strategy at J.P.
Morgan, and today I'm joined by my colleague Ipek Ozil, head of U.S. Interest Rate Derivative Strategy, to discuss the drivers and outlook of Fed policy and balance sheet expectations, along with their drivers and outlook for the Ester Sofer cross-currency basis. We are recording this podcast on 23rd January 2026, and our comments today are based on our published research available on J.P.
Morgan markets. So let me begin by a top-down analysis on global D.M. basis. Over the recent months, D.M. cross-currency bases have generally exhibited decent volatility, as they have been in a tug-of-war from various offsetting factors, ranging from shifting risk sentiments, Fed's balance sheet policy, and cross-border issuances.
However, D.M. bases are only marginally narrower across currencies, and interestingly, the Ester Sofer basis is teeteringly close to zero across the curve. A PCE analysis across various bases shows that the first PCE factor explains around 83% of the total variance at the front end, and this explanatory power jumps further to 90-plus for, say, the five-year basis. This shows that globally, cross-currency basis tends to move in unison to a large extent.
However, there are divergences as well. For instance, diverging monetary policy or dynamics around cross-border issuances could have some local dislocations. Our analysis shows that, for the most part, the Ester Sofer basis has been driven by evolution of relative monetary policies of the Fed versus the ECB, in addition to other idiosyncratic factors such as cross-border issuances, et cetera.
With that brief background, Ipek, let me start with you, asking you about the Fed. So the Sofer curve is pricing around, let's say, 40-ish basis points of cumulative cuts by the end of 2026, which seems excessive when I compare this versus our economist's call. What do you think is the driver for this discrepancy?
Thanks, Suryendra. And maybe let me just start with our economist's call. So we currently have the Fed on hold for the remainder of the year, and that's driven by signs of firming of labor data, and we already saw signs of that last month.
And as a reminder to our listeners, the unemployment rate declined to 4.4% in the December employment print. And additionally, we expect strong growth of about 2% for most of the year, and we do expect to see inflation relatively firm for the first part of the year as well. So given this backdrop, we don't think the Fed will need to cut any further, and we think they will keep rates on hold for some period of time.
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