A Grand Bazaar The information presented in this publication is communicated to you for informational purposes only and does not constitute investment advice, an offer to sell, or a solicitation to buy, and should in no way be used as a basis or be considered as an incentive to engage in any investment. The macro point Summer always holds surprises in the foreign exchange market. It was thought that volatility was dead in the EUR/USD. Finally, it bounced back last week following a higher-than-expected drop in inflation in the United States. We expect renewed volatility in the following pairs during the summer period: EUR/USD (due to uncertainty about monetary policy), CNY (rumors of currency devaluation by Chinese authorities as in August 2015), JPY (rumors of intervention by the Bank of Japan in the FX market) and emerging currencies (we observe a global movement of investor skepticism towards emerging assets). We have good and bad news. Which do you want us to start with? Okay, let's start with the good news. The disinflation process is accelerating in the United States. A year ago, consumer prices were at 9.1% year-on-year (June 2022 figures). They are now at 3% year-on-year - which is very close to the 2% target of the US Federal Reserve (Fed). Moreover, core inflation, which is a better indicator of price rise dynamics, is below the key interest rates for the first time since 2019. Before this economic announcement, 90% of market players expected the Fed to increase its key rate by 25 basis points at its scheduled meeting at the end of the month. This is no longer certain. It might be tempted to take another pause, as it did in June, given these encouraging figures regarding inflation. Ultimately, a recession (which leads to a significant demand compression and brings prices down) may not be necessary to return to 2%. The bad news is that monetary policy is becoming increasingly unpredictable. The disinflation process across the Atlantic is already reviving hopes of a future rate cut by the Fed to stimulate activity. It is certainly premature. In Canada, uncertainty is also present. The Bank of Canada (BoC) raised, as expected, its key rate by 25 basis points to 5% last week. Analysts anticipated further rate hikes. Ultimately, the central bank seems to be heading towards a new pause. The same goes for Australia. The prospect of a new rate hike next September no longer seems as certain as before. The Governor of the Reserve Bank of Australia indicated that all options are on the table. Finally, in emerging countries (which are the most penalized in the short term by the ongoing slowdown), talk of rate cuts is starting again. In Brazil, inflation is now below the central bank's target. It even reached a low point since September 2020. Some are therefore predicting a future rate cut. It should be noted, however, that inflation in most emerging countries, and particularly in Brazil, was comparatively lower than in developed countries in the post-Covid economic phase. The unpredictability of monetary policy usually rhymes with greater volatility in financial markets. It is not systematic. But it happens often. This is what happened last week with currencies. At the beginning of the week, the implied volatility on the EUR/USD was close to a low point for 17 months. But with the US inflation figure reshuffling the cards regarding the next Fed meeting, the euro broke out of its recent range and even climbed above 1.12 (crossing, in the process, significant resistance zones). A similar phenomenon occurred with the Japanese yen, which regained a lot of lost ground against the US dollar and the euro over the past week. Summer often holds surprises in the foreign exchange market. This also seems to be the case this year. Hence the importance of having an appropriate exchange risk hedging strategy. A few weeks ago, if you had asked FX analysts about the short-term trajectory of the EUR/USD, almost none would have predicted a surge above 1.12. It was clearly not the market's central scenario. Expect volatility to remain high this summer on several pairs: EUR/USD (due to uncertainty about monetary policy), CNY (rumors of currency devaluation by Chinese authorities as in August 2015), JPY (rumors of intervention by the Bank of Japan in the FX market) and emerging currencies (we observe a global movement of investor skepticism towards emerging assets). Technical point From a technical analysis perspective, the trend is bearish for the dollar index (a 3% drop over the past week). Hedge funds have positioned themselves over the last sessions for selling. This is a major factor that increases downward pressure on the dollar. This partly explains the rise of the EUR/USD. The pair now shows a nice increase of 4.6% since the beginning of the year. There will obviously be profit-taking in the coming sessions and a downward correction should occur. The rise of the yen is another notable element of recent days. It has taken place both against the US dollar and the euro. The EUR/JPY pair, for example, lost 1.15% of its value over five sessions. Economic fundamentals have not changed. It is rather a repositioning of investors that explains the rise of the yen. They believe that the Bank of Japan will not be able to go it alone for very long and maintain ultra-low rates. Caution is needed on this pair because short-term monetary policy visibility is reduced. The supports and resistances displayed below indicate the respective lows and highs within which the rates should evolve during the week. Announcements to follow This week will be quiet on the statistics front. But that doesn’t mean volatility will be low. Speculation about the next monetary policy decisions will continue (particularly concerning the Fed). In the UK, the inflation figure will be closely monitored. Everything suggests it will confirm the need for a substantial rate increase in August. The analyst consensus is for a 50 basis point hike. The British economy is the only developed country experiencing accelerating inflation. Brexit partly explains the price dynamics across the Channel (significant tensions in the labor market). Below you will find the publications and events that are expected to have a major impact on currency rate developments.DayTimeCountryIndicatorWhat to expect?07/19/202308:00UKConsumer Price Index (June)Previous at 8.7% year-on-year.07/20/202314:30USAPhiladelphia Fed Manufacturing Index (July)Previous at -13.7.