JP Morgan Reduce 'Long' U.S. Dollar Exposure, Raise EUR/USD Forecasts Near-term

- EUR/USD Q2 forecast at 1.19
- Longer-term weakness still expected
- Fed delays, EU reopening drive near-term upgrade

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Foreign exchange analysts at JP Morgan have shifted their stance on the U.S. Dollar and say their expectation for appreciation is being moderated, prompting an upgrade for the Euro against the Dollar.

The U.S. Federal Reserve's (Fed) unwavering stance on policy combined with the Eurozone's improved prospects on the back of a vaccination 'catch up' prompt them to look for a stronger performance in the Euro-to-Dollar exchange rate (EUR/USD).

"Our selectively bullish USD view has been challenged. The medium-term view is still for higher US yields and eventually modestly lower EUR/USD," says Meera Chandan, FX Strategist at JP Morgan in a regular monthly currency research briefing.

JP Morgan's near-term bullish stance on the Dollar in the first quarter of 2021 has been challenged in April and May by the Federal Reserve's (Fed) ongoing reluctance to bring forward the potential timing of a first interest rate hike.

"On the US side of the equation, pushback from Powell on tapering in the April FOMC meeting despite a more upbeat outlook combined with a couple of high-profile and sizeable misses in US data, specifically ISM and payrolls, which could result in a temporary time-out for US exceptionalism," says Chandan.

Market pricing continues to show an expectation for the first Fed rate hike taking place in the early 2023.

Fed Chairman Jerome Powell said at the April Fed briefing that "substantial further progress" towards the employment and inflation goals the Federal Open Market Committee (FOMC) is required before quantitative easing is reduced and steps towards a rate hike are taken.

A string of blockbuster payrolls reports are therefore required to turn the Fed's bow, but the May U.S. non-farm payroll report proved a bitter disappointment for Dollar bulls looking for the kind of blow-out reading required to do so.

The U.S. Dollar fell sharply across the board on Friday May 07 in the wake of a payroll reading of 266K, which is far less than the 978K number of jobs the market expected the U.S. economy to generate.

"The hiccup in the labor market recovery narrative... will extend the downward dollar pressure seen in 2Q to date," says Chandan.

The JP Morgan Dollar index printed a Year-to-Date closing high on March 30, but the broad dollar has retraced nearly all of its first quarter strength.

Regarding the Euro, JP Morgan says the economic re-opening in the Eurozone will likely prove a transitory prop.

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Euro outperformance comes on the back of "an improvement in European economic sentiment as the region’s vaccination programme finally starts to close the gap on its peers and high-frequency economic data has held up extremely well in the face of the most recent set of restrictions," says Paul Meggyesi, Head of FX Research at JP Morgan.

Germany on Friday said it would look to imminently allow a notable relaxation of rules given the country's Covid-19 infection rate was dipping below the crucial 100 / 100k threshold.

JP Morgan have lifted their EUR/USD forecast for the next two quarters by one cent (2Q is now 1.9, 3Q 1.18) as well as upgrading the risk bias around their bearish 1Y forecast of 1.16 from neutral to positive.

Indeed, the longer-term bearish thesis for the Euro-Dollar remains intact.

"The message nevertheless remains that even as European growth lifts, the region is not necessarily delivering the kind of genuine growth surprise that is generally necessary to shift exchange rates," says Meggyesi.

He says the Eurozone is likely to remain a laggard in terms of the underlying pace of growth given that what really sets the Eurozone and the U.S. apart is not the relative vaccine roll-out but rather the substantial and enduring fiscal thrust in the US.

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