The Chase Tower, New York © Kristen Cavanaugh, Flickr, reproduced under CC licensing.
The Wall Street bank says U.S. exceptionalism can deliver steady USD gains.
A new FX regime is in charge, and it should deliver USD strength through the remainder of 2026, according to new research from JP Morgan.
"We transformed from 'bullish beta, bearish USD' to 'bullish beta, bullish USD' in March," reads a new analysis note detailing why we're in a phase of renewed dollar outperformance.
Bullish beta means markets are in a risk-on stance, characterised by rising stocks. Because the USD is counter-cyclical and acts as a safe haven, it tends to weaken during these periods. That was the case prior to March.
But now, the inverse is true: "bullish beta, bullish USD" means the dollar will appreciate alongside stocks. This often happens during periods of U.S. exceptionalism, where international investors want to own all things America.
Image: JP Morgan.
In H2 "global growth recovers but USD exceptionalism lingers," and "U.S. cyclical strength and yield dominance will underpin the dollar"
The economy underpins the U.S. exceptionalist trade, as US payroll data shows employment remains robust and above estimates of breakeven jobs growth.
Researchers at JP Morgan say the AI theme will aid the U.S. exceptionalism story, and although it's now a familiar core macro theme, it's started to tilt more USD bullish.
Image JP Morgan.
Fed rate hikes will also play their part: JP Morgan's baseline expects low-intensity strength (USD index +3%), but with recognition that the onset of a Fed hiking cycle usually coincides with trend USD strength of ~5%.
Analysis shows that even as global central banks hike, "the dollar will retain a substantial yield advantage."
JP Morgan forecasts about 3% of broad USD upside, which it says is consistent with previous hiking episodes.
That's based on a view that the dollar tends to reliably appreciate by approximately 5% in the period between ~6 months leading up to the first Fed hike to ~1 month after.
The investment bank lowers its EUR/USD forecast to 1.10 from 1.13, noting Fed hikes have coincided with EUR/USD weakening by 15%.
Short-term, Beware Positioning
The bullish H2 dollar thesis could run into some short-term headwinds as stretched positioning cautions of an imminent USD setback.
"The market continues to add to USD length and as I mentioned yesterday, positioning is getting close to extreme. I am waiting for the right tactical moment to get short dollars, but we are not quite there yet as corporate month end approaches and gold continues to plummet," says Brent Donnelly, a veteran trader who currently heads strategy for Spectra Markets.
He adds that short positioning in US 2-year notes is also at an extreme, (meaning their yield could be ripe a pullback, and when that happens the USD would fall).
Donnelly explains that all this points to a market that is well positioned for a hawkish Fed at this point.
Just a word of caution on timing, however, "you don’t just randomly take the other side for no reason, of course."
"For now, I remain flat, twitchy, and excited, like a Fortnite bush camper in the final three."
