Analysts expect a continued dollar-centric market where most G10 currencies move in tandem against the dollar, keeping dollar correlations high. However, they are bearish on cross-correlations (e.g., involving Sterling and Euro), anticipating greater divergence between non-dollar currencies, which presents an opportunity for investors.

The bullish case for the Euro is weakening as growth signals outside the U.S. lose intensity. Critically, all of J.P. Morgan's developed market economic activity surprise indices have now fallen into negative territory, posing a significant challenge to the Euro's cyclical strength against the dollar.

While persistent inflation and energy pressures make the US dollar less bearish than before the conflict, this is not enough to alter the medium-term negative forecast. The key is now to be more selective, implementing dollar-bearish views through carry-efficient strategies rather than broad bets against the currency.

J.P. Morgan's systematic models now rank the Euro as the worst-performing currency across 27 liquid peers. While factors like carry and valuation have been weak, the recent underperformance of European equities versus the U.S. was the "missing piece" that solidified the quantitative bearish case, aligning it with the macro view.

While J.P. Morgan maintains a bullish bias on the Euro, it's not a high-conviction trade for capturing global growth. Its primary value is offering asymmetric upside with bounded downside (around 1.15). The currency is positioned for "explosive moves" if US data or policy falters, making it more of a strategic hedge.

During a global energy and food crisis, Europe effectively behaves like a large, import-dependent emerging market. This creates a direct terms-of-trade shock. The EURUSD currency pair offers a direct and highly liquid way to express this negative macro view.

Last year's dollar weakness was driven by two factors no longer present: softening US data and outperforming European growth. With European data and equities now cratering, the narrative is shifting back to US exceptionalism. This suggests any dollar weakness from geopolitical de-escalation will be short-lived, with a return to strength likely.

J.P. Morgan's 2026 outlook is "Bearish Dollar, Bullish Beta," favoring pro-cyclical and high-yield currencies. They expect the dollar's decline to be smaller and narrower than in 2025 unless US economic data significantly weakens, shifting from the more aggressive bearishness of the previous year.

A key macro theme is the decoupling of US and German interest rate paths. J.P. Morgan expects US Treasury yields to rise toward 4.5% due to a hawkish Fed and strong labor markets. Conversely, weak eurozone growth and lower fiscal pressure suggest German yields have scope to fall, creating a clear medium-term relative value opportunity.