As we approach the second half of 2024, investors are closely watching currency movements for indicators of how the forex market may shape up over the next few months.

In this context, JPMorgan published its forecast for the US dollar. The bank’s analysis takes into account various economic forces and geopolitical events that are expected to impact the dollar’s trajectory.

JPMorgan Dollar Forecast

The medium-term assessment of the US dollar remains sanguine due to high yields, growth cushion and other supporting factors.

However, the bank notes that “tactical concerns arise from emerging signs of waning exceptional U.S. economic growth and saturation of investor long positions.”

“Divergences in inflation will be key as central banks focus on inflation, not growth,” JPMorgan wrote. “The lessons from the US soft/stable inflation print are clear for the Fed’s price direction, but for the dollar they are more nuanced.” The bank states that DXY was more sensitive to inflation misses.

Factors influencing dollar rates

Analysts at JPMorgan pointed to the dollar’s advantage against the greenback despite being a defensive currency and its continued uniqueness in the U.S. as two factors driving the U.S. dollar’s rise.

However, while the first pillar of USD strength (the carryover advantage) remains intact, the second (persistent U.S. exceptionalism) “seems to be in the early stages of losing its luster,” they wrote.

The bank says it is cautious about this tactical risk and last week recommended tactically reducing the length of USD trades, although it continued to maintain long USD exposure through options.

Elsewhere, focusing on the current picture of the U.S. economy, Chris Turner, Global Head of Markets and Regional Research Director for ING UK and CEE, told Investing.com that the dollar’s share of foreign exchange reserves has fallen over the last 20 years but has remained stable in recent years, while in the private sector “the share of the dollar in global deposits and global liabilities has been remarkably stable over recent decades, in the range of 60-70%.”

Still, it says U.S. authorities cannot become complacent. “We also note that while the U.S. current account deficit is manageable at 3% of GDP, it is largely financed by portfolio inflows into long-term debt securities,” Turner said.

He believes the medium-term risk for Treasuries and the dollar is that without fiscal consolidation, “investors will need higher U.S. yields and a cheaper dollar for Treasuries to be attractive.”

Moreover, the US elections are seen as having the greatest impact on the price of the dollar over the next four to five years.

“Continuity of a Democratic administration is probably slightly negative for the dollar,” Turner says. “The Republican tidy agenda will bring in a massive positive dollar on the back of loose fiscal policy and tighter monetary policy. The left-wing risk for the dollar is a Trump presidency without Congress, during which Trump could seek stimulus in a weaker dollar – a policy advocated by Robert Lighthizer, a member of Trump’s trade team.

USD to JPY Forecast

As for , JPMorgan says it remains bullish on the Fed’s interest rate path, with growth risks from Japan behind the curve.

“Our FY24 USD/JPY forecast remains at 153 as we anticipate USD/JPY to remain anchored to the Fed policy interest rate path,” the bank writes, explaining that their forecast is based on two Fed rate cuts this year. However, they believe that if the US economy remains resilient and Fed rate cuts are not included, the USD/JPY pair could stabilize at 160.

“On the other hand, we are aware of upside risks from Japan as domestic and speculative selling pressure on JPY is unlikely to abate as long as the BoJ remains behind the curve, suggesting Japan’s real interest rate is likely to remain negative in the coming years – says JPMorgan.

USD to GBP Forecast

On GBP, JPMorgan says UK growth is improving, but GBP seasonality, valuations and positioning are quickly pointing to a lack of tactics. The bank also explains that sterling is a currency with a high cyclical beta, so industrial recovery is critical.

“May seasonal pressure [the] ,” they argue. “The GBP position has been moved from extremely long to moderately tiny, but is less stretched than other G10 competitors.”

As a result, one of the bank’s trading recommendations in the macro portfolio is to sell GBP against the US dollar.