Global FX: EUR-USD Divergences, Systematic Signals, Sterling Struggles

The latest U.S. inflation data has reignited a bullish case for the dollar. Core CPI held steady while the PPI surged, and import‑export price indices jumped, producing one of the biggest inflation‑surprise spikes since 2022. At the same time, U.S. earnings beat expectations by roughly 18 percent, far outpacing Europe’s 4 percent surprise. These factors narrow the real‑yield gap between the United States and the euro area, prompting JPMorgan’s strategy team to shift back to a tactical long‑dollar stance after a period of caution tied to the Iran‑U.S. conflict.

Euro weakness has become entrenched, prompting a downgrade of the EUR/USD target from 120 to a range of 113‑115 for the second half of the year. Systematic multi‑factor models now rank the euro as the poorest‑performing currency among 27 liquid pairs, with weak carry, muted momentum, and unfavourable commodity terms of trade. By contrast, the dollar sits in the top three on equity‑momentum signals, reflecting the stark U.S. versus European earnings divergence. G10 carry baskets remain robust, delivering 3‑6 percent YTD returns, while emerging‑market carry faces short‑term headwinds.

The Canadian dollar is also on the back foot, as divergent labour‑market data and a softer Canadian payroll picture widen the gap with the United States, reinforcing a long‑dollar bias. In the United Kingdom, political turbulence surrounding a potential Labour leadership challenge adds a near‑term risk premium to sterling, with the pair likely testing 0.88‑0.89. However, analysts note limited market pricing for a prolonged fiscal shock, and solid UK data could cap any prolonged weakness.