Bond Bulletin

The euro breaks free as risk premiums unwind

Bond Bulletin
Bond Bulletin
GFICC Investors

Published: 20-02-2025

The FQT research framework

Functional factors

Include macroeconomic data (such as growth and inflation) as well as corporate health figures (such as default rates, earnings, and leverage metrics).

Quantitative valuations

Is a measure of the extent to which a sector or security is rich or cheap (on both an absolute basis as well as versus history and relative to other sectors).

Technical factors

Are primarily supply and demand dynamics (issuance and flows), as well as investor positioning and momentum.

Having traded near three-year lows, the euro has rebounded against the US dollar in recent weeks. This week’s Bond Bulletin examines what has caused a change in sentiment in EUR/USD, and whether it will last.

accordion icon

Fundamentals

Recent market developments have brought a shift in sentiment for Europe, with key geopolitical risk premiums beginning to unwind. Markets are increasingly pricing out two major sources of uncertainty that have weighed on European assets: US-EU trade tensions and the ongoing war in Ukraine. So far, smaller peripheral currencies, such as Swedish krona and Hungarian forint, have reacted the most. However, if the rally broadens out, the bloc currency could soon follow suit. On the trade front, early signals from Washington suggest a more measured approach to tariffs than previously feared. While the full extent of future trade policies remains uncertain, there is growing market confidence that a large-scale tariff escalation, particularly in key European industries, may not fully materialise. As a result, the risk premium that had been embedded in the euro is beginning to unwind. There does, however, remain a risk that Trump initiates higher tariffs in Europe, in which case we would expect EUR/USD to fall. Meanwhile, diplomatic momentum surrounding the Ukraine war has improved. While a resolution remains far from certain, markets have started to price in a lower probability of further escalation. This has had a positive impact on European investor sentiment, reducing the discount applied to eurozone assets. Additionally, any de-escalation could meaningfully improve Europe’s energy security situation, with lower natural gas prices and more diversified supply chains contributing to economic resilience. At the same time, the broader macroeconomic landscape is shifting in favour of the euro. Eurozone growth expectations have been revised higher in recent months, supported by domestic demand and expectations of higher defence spending. In contrast, the US economic exceptionalism narrative, which had underpinned dollar strength for much of 2023 and 2024, is beginning to moderate. These factors, combined with increased capital flows into European assets, have supported the euro’s rally and could continue to provide further upside.

accordion icon

Quantitative valuations

Despite the recent rally, EUR/USD remains undervalued relative to long-term purchasing power parity (PPP) models. While the euro has rebounded from its post-pandemic lows, its fair value based on inflation-adjusted exchange rate metrics remains above current spot levels. Structural capital flow dynamics could help close this valuation gap over time. As European assets attract renewed interest, the case for further upside in the euro strengthens. While near-term volatility remains a factor, the broader macro backdrop suggests that EUR/USD could continue its gradual appreciation.

accordion icon

Technicals

Positioning shifts have reinforced the latest leg higher in EUR/USD, with sentiment toward the dollar softening. In options markets, long USD positions have been steadily unwound, signalling a broader recalibration of expectations for US dollar strength. A key technical driver has been the rotation in global equity flows. European equities are now outperforming their US counterparts, reversing a multi-year trend. The eurozone’s improving economic fundamentals, coupled with a more stable political outlook, have helped drive renewed investor interest in European risk assets. This has resulted in a pickup in cross-border flows, with capital moving out of US markets and into Europe. The currency pair is close to clearing key resistance levels, with technical indicators suggesting further room for upside should momentum persist.

US investor inflows into Eurozone equity ETFs has picked up in February as inflows into US equities have slowed

US investor inflows into Eurozone equity ETFs has picked up in February as inflows into US equities have slowed

Source: Bloomberg. Data as of 18 February 2025.

What does this mean for fixed income investors?

With geopolitical risk premiums fading, technical positioning shifting, and valuations still supportive, the medium-term outlook for the euro has become more constructive. A sustained break above recent resistance levels could set the stage for further gains, particularly if incoming data continues to support the case for stronger European growth relative to the US. However, risks from tariffs should not be ignored, and investors should be cautious in their conviction in EUR/USD if Europe enters a trade war scenario. As such, we maintain a short USD bias in our active currency portfolios, with longs against a broad, diversified basket of undervalued currencies that could benefit as market risk alleviates, including EUR.

About the Bond Bulletin

Each week J.P. Morgan Asset Management's Global Fixed Income, Currency and Commodities group reviews key issues for bond investors through the lens of its common Fundamental, Quantitative Valuation and Technical (FQT) research framework.

Our common research language based on Fundamental, Quantitative Valuation and Technical analysis provides a framework for comparing research across fixed income sectors and allows for the global integration of investment ideas.



NOT FOR RETAIL DISTRIBUTION: This communication has been prepared exclusively for institutional, wholesale, professional clients and qualified investors only, as defined by local laws and regulations.
The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment in any jurisdiction, nor is it a commitment from J.P. Morgan Asset Management or any of its subsidiaries to participate in any of the transactions mentioned herein. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit and accounting implications and determine, together with their own financial professional, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.
J.P. Morgan Asset Management is the brand for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide.
To the extent permitted by applicable law, we may record telephone calls and monitor electronic communications to comply with our legal and regulatory obligations and internal policies. Personal data will be collected, stored and processed by J.P. Morgan Asset Management in accordance with our privacy policies at www.jpmorgan.com/global/privacy.
This communication is issued by the following entities:
In the United States, by J.P. Morgan Investment Management Inc. or J.P. Morgan Alternative Asset Management, Inc., both regulated by the Securities and Exchange Commission; in Latin America, for intended recipients’ use only, by local J.P. Morgan entities, as the case may be. In Canada, for institutional clients’ use only, by JPMorgan Asset Management (Canada) Inc., which is a registered Portfolio Manager and Exempt Market Dealer in all Canadian provinces and territories except the Yukon and is also registered as an Investment Fund Manager in British Columbia, Ontario, Quebec and Newfoundland and Labrador. In the United Kingdom, by JPMorgan Asset Management (UK) Limited, which is authorized and regulated by the Financial Conduct Authority; in other European jurisdictions, by JPMorgan Asset Management (Europe) S.à r.l. In Asia Pacific (“APAC”), by the following issuing entities and in the respective jurisdictions in which they are primarily regulated: JPMorgan Asset Management (Asia Pacific) Limited, or JPMorgan Funds (Asia) Limited, or JPMorgan Asset Management Real Assets (Asia) Limited, each of which is regulated by the Securities and Futures Commission of Hong Kong; JPMorgan Asset Management (Singapore) Limited (Co. Reg. No. 197601586K), this advertisement or publication has not been reviewed by the Monetary Authority of Singapore; JPMorgan Asset Management (Taiwan) Limited; JPMorgan Asset Management (Japan) Limited, which is a member of the Investment Trusts Association, Japan, the Japan Investment Advisers Association, Type II Financial Instruments Firms Association and the Japan Securities Dealers Association and is regulated by the Financial Services Agency (registration number “Kanto Local Finance Bureau (Financial Instruments Firm) No. 330”); in Australia, to wholesale clients only as defined in section 761A and 761G of the Corporations Act 2001 (Commonwealth), by JPMorgan Asset Management (Australia) Limited (ABN 55143832080) (AFSL 376919).
For U. S. only: If you are a person with a disability and need additional support in viewing the material, please call us at 1–800–343–1113 for assistance.
© 2025 JPMorgan Chase & Co. All rights reserved
935940f3-b719-11ef-b028-a33e9214ecc9
GFICC Investors

Published: 20-02-2025

The FQT research framework

Functional factors

Include macroeconomic data (such as growth and inflation) as well as corporate health figures (such as default rates, earnings, and leverage metrics).

Quantitative valuations

Is a measure of the extent to which a sector or security is rich or cheap (on both an absolute basis as well as versus history and relative to other sectors).

Technical factors

Are primarily supply and demand dynamics (issuance and flows), as well as investor positioning and momentum.