J.P. Morgan: Maintaining bearish euro view as energy shock and growth divergence reshape FX trading

Why keep euro shorts and tighten profit-taking levels?

JPMorgan says short positions in the euro against several currencies continued to move in its favor this week. Based on Sharpe ratios calculated from daily returns, euro crosses were the clearest trending trade in G10 FX in October. The bank is maintaining its positions while tightening profit-taking levels on some trades.
The European Central Bank discussed raising rates, reflecting the potential for higher energy prices to have second-round inflation effects. But the bank believes a rate hike amid weakening growth and tighter financial conditions would not be positive for the euro. French fiscal risks and still-high French government bond spreads add further pressure.
At the post-meeting press conference, Lagarde confirmed that a rate hike had been discussed, sending the euro higher against the dollar that day. If the Middle East conflict escalates again, the terms of trade for energy-importing regions could deteriorate, while the dollar could benefit from commodity terms of trade and safe-haven demand.

The Federal Reserve retained a tightening bias, but the chair's comments on inflation and willingness to wait for more information did not provide the hawkish signal needed to immediately drive another leg higher in the dollar. Short-end yields fell after the meeting, while the dollar's overall pullback was relatively modest.
The bank still holds a basket of long dollar positions against the euro, Swedish krona and Canadian dollar. The US manufacturing PMI and the prices-paid measures in the New York Fed survey rose to new highs for this cycle; JPMorgan economists expect resilient economic activity and sticky inflation to prompt the Fed to raise rates in December.
Technology stock valuations are a major risk for the dollar: earnings at major US technology companies were mixed, and doubts about AI commercialization weighed on share prices. However, the bank's equity strategists note that the extent to which actual AI capital expenditure exceeds expectations has grown each quarter. JPMorgan believes it is too early to call a peak in AI capital spending growth before that outperformance begins to narrow.
Next week's US nonfarm payrolls data could have effects in either direction: the bank expects about 75 thousand jobs to be added and unemployment to fall to 4.1%; a result close to that forecast would support expectations of a rate hike in December. Significantly weak data could reduce the rate hikes priced in by markets.

JPMorgan maintains a long position in the pound against the euro. The UK's Office for Budget Responsibility cut its 2027 growth forecast from 1.6% to 1.0%, below the bank's forecast of 1.5%. The bank believes that if actual growth proves more resilient, future borrowing pressures could be lower than the budget forecast implies.
A Bank of England rate hike is widely expected; additional opportunity for the pound lies in more hawkish guidance. The recent unemployment rate was 4.7%, below the central bank's forecast of about 5.3% next year. But markets have already priced in about 100 basis points of cumulative tightening by mid-2027, limiting the scope for policy repricing.
The bank continues to hold a long Norwegian krone position against the Swedish krona, citing interest-rate differentials and energy-related terms of trade. Markets have broadly priced in the Riksbank's next rate hike, and even with three more hikes as forecast by the bank's economists, the Swedish krona would remain a low-yielding currency.
The Australian dollar is also supported by rate-hike expectations and interest-rate differentials, but seasonal patterns are at odds with the position: from 2011 to 2025, the median decline in the Australian dollar against the New Zealand dollar in November was 1.4%; the median decline in the Norwegian krone against the Swedish krona over the same period was 1%. Falling energy prices or worsening equity market risk sentiment would also hit the Norwegian krone.

The Bank of Japan kept its policy rate at 1.25%, and its governor gave no clear signal of faster rate hikes or a higher terminal rate. Markets had already priced in roughly an 80% probability of a rate hike in December, so the meeting did not lead to sustained yen appreciation.
JPMorgan still holds long yen positions against the Canadian dollar and Swedish krona. In the near term, it is more focused on global risk aversion and the quarterly asset allocation report from Japan's Government Pension Investment Fund on 6 November. The bank also remains cautious on the yen's medium-term outlook: risks from Japanese fiscal spending and potential additional government bond issuance will receive greater attention when the year-end budget and bond issuance plan are finalized.