Currency volatility:
Will the US dollar regain its strength?
Updated: July 28, 2025
Key takeaways
- U.S. moderation is expected to be USD-negative, and broad-based tariffs could amplify the dollar’s downtrend.
- On the other hand, the outlook for the euro is bullish, driven by medium-term factors including U.S. growth moderation and German fiscal support.
- Both fiscal and monetary policy could continue to weigh on the pound relative to the euro, even if they could both rise relative to the dollar.
- While the Japanese yen has depreciated against most G10 currencies, J.P. Morgan Global Research remains modestly bullish on JPY versus USD.
Introduction
Previously primed for new highs, the dollar has depreciated significantly in recent months. Its decline gained further momentum post-Liberation Day, with the U.S. experiencing growth downgrades and inflation upgrades on the back of the tariff announcements. As of July 11, the U.S. dollar index was down 10% year to date, marking its weakest first-half performance since at least 1980.
Looking ahead, improving global growth and rising commodity prices look set to create more cross-currents in the FX market. Against this backdrop of heightened forex volatility, what’s the outlook for the U.S. dollar, euro, British pound and Japanese yen?
The outlook for major currency pairs
Source: J.P. Morgan
GBP/USD is forecast to reach 1.37 in September 2025, 1.36 in December 2025, 1.39 in March 2026 and 1.37 in June 2026. EUR/USD is predicted to reach 1.19 in September 2025, 1.20 in December 2025, and 1.22 in March and June 2026. USD/JPY is expected to hit 141 in September 2025, 140 in December 2025, and 139 in March and June 2026.
Meera Chandan
Co-head of Global FX Strategy, J.P. Morgan
The outlook for the US dollar
In March, J.P. Morgan Global Research turned bearish on the dollar for the first time in four years — a view it continues to maintain for the medium term. “We look for more USD weakness this year, predicated on the same combination of cyclical factors (including U.S. moderation and tariffs) and structural factors (such as valuations, fiscal, flow dynamics and policy uncertainty) that we have been discussing for several months now,” said Meera Chandan, co-head of Global FX Strategy at J.P. Morgan.
Indeed, the macro landscape continues to be supportive of the bearish outlook. U.S. moderation is expected to be USD-negative, and broad-based tariffs could amplify the dollar’s downtrend. “The growth impact of such tariffs will be onerous globally, but the inflation impact will be differentiated — so inflationary for the U.S. and deflationary for the rest of the world (RoW). This should continue to weigh on real policy rates in the U.S., reducing the attractiveness of the dollar,” Chandan added.
Other U.S. policy channels could put further pressure on the greenback too. “On fiscal, the U.S. did pass the Trump administration’s mega bill, but there is no obvious growth-positive fiscal thrust after accounting for tariff revenue. This likely leaves the pass-through to USD skewed to the downside, given the implicit higher term premium and still-soft supply-demand dynamics in the Treasury market,” Chandan said. In addition, lower net immigration flows and the Trump administration’s push for the Fed to cut rates could further compound dollar weakness.
Granted, several systematic indicators have become less USD-bearish, which could point to some consolidation or even a rebound in the near term. “Our flagship growth momentum model has turned modestly USD bullish. However, we consider these signals less relevant over the medium term,” Chandan noted. “The underlying macro landscape is undergoing a significant shift, which means dislocations could get larger.”
The U.S. dollar has largely mirrored moves in Brent prices since late 2022.
The outlook for the euro
After holding a bearish view of the euro for most of 2024, J.P. Morgan Global Research turned bullish in March. “The German federal budget that was recently passed indicates more expansionary than expected fiscal policy, which is likely to support growth,” Chandan said. “The European Central Bank (ECB) has suggested that it could be approaching an end, or at least a pause, to the easing cycle. Though not a requirement for the euro-positive view, it is a euro-favorable development.”
EUR/USD tested its four-year high of 1.18 in July, driven by rate differentials and relative equity performance. “Fair value by most estimates is closer to 1.11 to 1.12, but we do not expect this to be a constraint on EUR/USD strength in the medium term. At worst, we expect a period of consolidation before a resumption toward further strength,” Chandan said.
Overall, J.P. Morgan Global Research expects EUR/USD to hit 1.19 by September 2025 and climb to 1.22 by March 2026. “While it is possible that FX markets could take a breather in the near term after recent large moves, we expect that the medium-term factors of U.S. moderation, currency hedges rebalancing, German fiscal support and changes in U.S. policy to be the more persistent bullish drivers of EUR/USD,” Chandan added.
The outlook for the British pound
Even though the pound has risen against the dollar in recent months, the outlook remains bearish. “It’s somewhat misleading to look at GBP/USD as a barometer of sterling performance given that most G10 currencies are near year-to-date highs versus what has been a very weak USD this year. The pound has underperformed its European peers and we think more is to come, particular versus EUR, CHF and Scandi currencies,” Chandan said.
Looking ahead, both fiscal and monetary policy could continue to weigh on the pound relative to peers. The U.K. labor market is softening, which could see the Bank of England (BoE) slashing rates later in the year. In addition, a decrease in spending cuts suggests the Autumn budget could see sharper fiscal tightening, putting yet more pressure on the sterling.
“With markets having been positioned in long GBP/USD, U.K. vulnerabilities have been swept under the carpet. As a result, there is a bearish feedback loop that we think isn’t priced into the currency, where weak growth requiring more fiscal tightening, which then weakens growth further, which requires more fiscal tightening,” Chandan observed.
All things considered, J.P. Morgan Global Research predicts GBP/USD could fall to 1.36 by December 2025, before recovering to 1.39 by March 2026. “If the fiscal and monetary channels do weaken GBP further, that in our view should allow markets to more appropriately price the longer-term GBP vulnerabilities including persistent basic balance deficits, supply-side labor market issues and relative productivity underperformance,” Chandan added.
The outlook for the Japanese yen
The Japanese yen has broadly weakened in recent weeks. Since the Liberation Day announcement, it has depreciated against most G10 currencies besides the USD, resulting in a 2.3% decline in trade-weighted terms. J.P. Morgan Global Research’s bullish yen view hinges, above all, on U.S. moderation, which it should be a key beneficiary of.
“We believe the recent weakness has been driven by a gradual unwinding of speculative JPY long positions due to factors such as rising stock prices, improved risk sentiment, retreating expectations for rate hikes, fiscal concern amid heightening uncertainties surrounding domestic politics, waning expectations for a U.S.–Japan currency agreement and the lack of a de-dollarization movement in Japan,” Chandan noted. “However, the expected impact of the aforementioned factors is mixed and they are likely to offset each other, resulting in a limited overall impact.”
Tariffs are unlikely to significantly affect Japan’s trade balance, reflecting the country’s low dependence on external demand and high local production. However, if they bring about a decline in Japanese stock prices, the yen could appreciate as a result — at least in the short term.
All in all, despite recent developments, J.P. Morgan Global Research remains modestly bullish on JPY versus USD and expects USD/JPY to end the year at 140, before falling to 139 in March 2026.
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