JP MORGAN CHASE(US:JPM)2025-11-27 05:43Summary of Global FX Outlook 2026 Company and Industry - Company: J.P. Morgan - Industry: Foreign Exchange (FX) Market Key Points and Arguments 1. FX Outlook for 2026 - The outlook is bearish on the dollar in the first half of 2026 due to Fed asymmetries, twin deficits, and global recovery, but weakness is constrained by US resiliency [6][37][38] - Expected currency levels include EUR/USD at 1.20, USD/JPY at 164, and USD/CNY at 7.05 [6] 2. Drivers of FX Returns in 2025 - DM FX returns were influenced by external and fiscal balances, while global FX/EM returns were primarily driven by carry [5][8] - Liberation Day marked a significant weakening of the dollar, leading to a pro-risk environment characterized by strong performance in global/EM carry trades [5][10] 3. Lessons from 2025 - The dollar's strength was short-lived, with key risks materializing earlier than expected, leading to a shift from bullish to bearish sentiment [4][10] - Fiscal differentiation played a crucial role, with the Euro's rise linked to positive German fiscal developments [14] 4. Macro Landscape for 2026 - The macro environment is characterized by synchronized central bank inactivity, ongoing fiscal policy focus, and the impact of AI adoption [6][12] - The US policy mix remains a source of FX risk, with a focus on fiscal policy rather than tariffs [6][12] 5. AI and Market Dynamics - AI is expected to influence markets through financial and macro channels, potentially supporting US growth but also reviving de-dollarization discussions [29] - The macro effects of AI are still developing, with job displacement not yet materializing significantly in labor market data [29] 6. Fiscal Policy and Tariff Volatility - Fiscal policy surprises are anticipated, particularly in the US, with potential for stimulus surprises due to mid-term elections [28] - Tariff volatility is expected to decrease in 2026, although some tactical volatility may arise from IEEPA rulings [60][67] 7. Dollar's Carry Appeal - The dollar's nominal carry appeal remains high despite Fed easing, influencing asset owners' FX hedging decisions [50] - The dollar's performance is expected to be influenced by various macro scenarios, including potential Fed hikes in 2027 [49][50] 8. Risks and Scenarios for the Dollar - The dollar could weaken if US growth moderates sharply or if the Fed's reaction function turns dovish amid political pressures [48][39] - Conversely, a stronger US growth scenario could lead to a bullish outlook for the dollar [48][58] 9. Conclusion on FX Trends - The FX landscape heading into 2026 is marked by lower dispersion across style factors, indicating less conviction on differentiating currency returns [30] - High-yielding currencies are expected to perform better in a procyclical growth environment, while low-yielders may lag [6][37] Other Important Content - The relationship between equities and FX is complex, with significant implications for the AI equity-USD link in the upcoming year [15] - The evolving dollar smile indicates that US-RoW relative cyclical dynamics are becoming more influential on the dollar's performance [15]