A resurgence of "U.S. exceptionalism"—driven by strong inflation, labor data, and significant corporate earnings outperformance vs. Europe—is causing a major macro divergence. This has prompted J.P. Morgan to lower its EUR-USD targets and adopt a bearish outlook for the first time in a year, seeing any relief rallies as short-lived.
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.
Despite headlines about a potential leadership challenge, any resulting weakness in Sterling is expected to be short-lived and limited. The market isn't pricing in significant adverse fiscal outcomes, positioning is already short, and the protracted, multi-month timeline for any political resolution means market focus will likely "fizzle out" before a conclusion is reached.
A notable divergence has appeared in carry strategies. While popular Emerging Market (EM) carry baskets have suffered moderate losses, G10 carry factors have been remarkably strong, gaining 4% since early April. This G10 performance is highly concentrated in a few positions (long AUD/NOK, short JPY/SEK) that are benefiting from multiple tailwinds simultaneously.
The case for Canadian Dollar weakness against the USD is structural, not just a tactical play on central bank policy. Diverging labor market data—with the U.S. adding jobs while Canada sees significant net losses and a rising unemployment rate—highlights a superior U.S. fundamental picture that justifies a continued upward bias for the USD/CAD pair.