In this context, JPMorgan has released its forecast for the U.S. dollar. The bank’s analysis delves into the various economic forces and geopolitical developments expected to influence the dollar’s trajectory.
The bank’s medium-term view of the U.S. dollar is still bullish based on high yields, its growth cushion, and other supporting factors.
However, the bank does note that “tactical concerns stem from nascent signs of fading US growth exceptionalism and saturated investor longs.”
“Inflation divergences will be key as central banks are inflation- rather than growth-focused,” wrote JPMorgan. “Implications from soft/ firm US inflation prints are obvious for the direction of Fed pricing, but more nuanced for USD.” The bank states that DXY has been more sensitive to inflation misses.
Analysts at JPMorgan highlighted the dollar’s carry advantage despite being a defensive currency and its persistent US exceptionalism as two factors driving its bullishness on the U.S. dollar.
However, while the first pillar of USD strength (carry advantage) remains intact, the second one (persistent US exceptionalism) “appears to be in early stages of losing its sheen,” they wrote.
The bank says it is wary of these tactical risks, and has been recommending tactically reducing USD length in the past week, although still maintaining long USD exposure via options.
Elsewhere, focusing on the current picture for the U.S economy, Chris Turner, ING’s Global Head of Markets and Regional Head of Research for UK & CEE, told Investing.com that the dollar share in FX reserves has come down over the last 20 years but has been stable over recent years, while in the private sector, “the dollar’s share in global deposits and in global liabilities has been remarkably stable in the 60-70% area over recent decades.”
Even so, he states that U.S. authorities cannot be complacent. “We note also that while the US current account deficit is very manageable at 3% of GDP, it is largely financed by portfolio flows into long-term debt securities,” said Turner.
He feels that the medium-term risk for Treasuries and the dollar is that without fiscal consolidation, “investors will require higher US yields and a cheaper dollar to find Treasuries attractive.”
Furthermore, the U.S. elections are seen as having a major say in the pricing of the dollar over the next four to five years.
“A continuity Democrat administration is probably a mild dollar negative,” says Turner. “A Republican clean sweep a big dollar positive on loose fiscal and tight monetary policy. A left-field risk to the dollar is a Trump Presidency without Congress, where he could look to a weaker dollar for stimulus – that’s a policy advocated by Robert Lighthizer – a member of Trump’s trade team.”
When it comes to the USD/JPY, JPMorgan says it continues to be anchored by the Fed policy rate path with upside risks from Japan being behind the curve.
“Our USD/JPY forecast for YE24 is kept at 153 since we envisage USD/JPY continues to be anchored by Fed policy rate path,” writes the bank, explaining that their forecast is based on two Fed cuts this year. However, they feel that if the US economy remains resilient and there are no Fed cuts are priced in, the USD/JPY can stabilize at 160.
“On the other hand, we are aware of the upside risks from Japan side since domestic and speculative JPY selling pressures are unlikely to wane so long as BoJ remains behind the curve, suggesting Japan’s real interest rate will likely remain in negative territory in coming years,” JPMorgan says.
For the GBP, JPMorgan says that growth in the UK is improving but GBP seasonality, valuations, and positioning prompt tactical shorts. The bank also explains that sterling is a high beta cyclical currency, so the manufacturing recovery matters.
“May seasonality pressures [the] GBP/USD,” they argue. “GBP positioning has moved from max long to modestly short, but this is less stretched than other G10 peers.”
As a result, one of the bank’s trade recommendations in its macro portfolio is to sell the GBP against the U.S. dollar.
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