American Disinflation: The Picture Was Already Outdated

The macro point

It was the most anticipated figure of the week, and it surprised everyone. Published on Tuesday, July 14, the American consumer price index fell by 0.4% in June (the largest monthly drop since April 2020) bringing annual inflation down from 4.2% to 3.5%, well below the expected 3.8%. The driver is identifiable: energy fell by 5.7% for the month, with gasoline down 9.7%. Bond yields plunged, and the greenback hit a one-month low midweek.

How to explain this? This figure captures the month of June, that is, the lull that followed the June 17 ceasefire memorandum between Washington and Tehran: Strait of Hormuz reopened, crude on the decline, prices at the pump down. However, this sequence is over. The past week saw cross-strikes multiply, Iran attacking a major oil facility in Kuwait on Saturday, then declaring the ceasefire void. Transits in the strait collapsed and Brent rose above $90 on Monday morning, about 20% above its pre-war level.

Should we dismiss this price decline with a wave of the hand? No. June's disinflation is not limited to energy: core inflation remained stable for the month and slowed from 2.9% to 2.6% over a year, non-energy services were flat, and housing rose only 0.1%. Part of the movement is therefore real, and that's precisely what convinced the market to reduce its Fed rate hike bets.

The timing is cruel. July's CPI (the first to include the new crude surge) will not be published until mid-August, after the July 28-29 Fed meeting. The committee will have to make a decision based on a June figure that oil prices have already disproven. A status quo at 3.50-3.75% is the market's central scenario, but Kevin Warsh's press conference promises to be delicate: difficult to close the door to a hike when Brent is soaring, difficult to brandish it when prices have just fallen.

So, June's American disinflation is partly an energy illusion. As long as the Strait of Hormuz remains a battlefield, inflation will maintain a high floor, and it seems premature to definitively bury Fed hikes. For exposed companies, the consequence is concrete: an EUR/USD without clear direction, tossed between safe haven flows and rate expectations. In this regime, systematic flow coverage takes precedence over directional betting.

Technical point

The foreign exchange market is experiencing a tug-of-war between two opposing forces: geopolitics, which pushes towards safe havens, and rate expectations, which turned against the dollar after the CPI.

The EUR/USD is trading around 1.1440, slightly higher on the week, after hitting its best level since June 19 during the session. Thursday, the ECB is expected to keep its deposit rate at 2.25% but Christine Lagarde's conference will be decisive: a September hike is widely anticipated, and its implicit validation would support the euro. Conversely, a new crude surge would give the safe haven dollar the advantage. We expect the pair to oscillate between 1.1325 and 1.1555 this week.

Regarding the Canadian dollar, the Bank of Canada maintained its key rate at 2.25% on Wednesday, a sixth consecutive hold with a cautious tone. But Tiff Macklem warned: increases could become possible again if oil settles sustainably higher. Interesting detail: short positions on the currency are at their highest since late 2024. With a Brent above $90, the potential for forced buybacks is real, which argues for a downward oriented EUR/CAD.

The Japanese yen remains the major sacrifice of the current regime. At 185.76 against the euro and about 162.35 against the dollar, it is still near its historic lows. The Bank of Japan indeed raised its rate to 1.00% in June, but the gap with the rest of the G10 remains abysmal and consensus does not see another move before autumn. Japan's June inflation on Friday will tell if normalization can accelerate.

The franc still plays its role of buffer wisely: EUR/CHF remains anchored around 0.9230, at the heart of the 0.92-0.93 zone where analysts see it evolving in the coming months. On the British side, EUR/GBP evolves around 0.8502. UK's inflation on Wednesday (expected to decline to 2.7%) will calibrate the Bank of England's July 30 decision, still at 3.75%: a prudent figure would support the status quo and leave the pair in its corridor.

The supports and resistances displayed below indicate the low and high points within which the prices should evolve during the week.

Announcements to follow

The week will be dominated by the ECB meeting on Thursday and the flash PMIs on Friday, the first snapshot of July activity on both sides of the Atlantic. In the eurozone, services edging closer to the 50-point threshold would argue for a September hike; in case of a relapse, the bet would become more fragile. UK's inflation on Wednesday will complete the picture before the Bank of England decision the following week.

And in the background, one thing is clear: every night in the Gulf can reshuffle the deck. Another shock in Hormuz would eclipse any statistic in the calendar.

The information presented in this publication is provided solely for informational purposes and does not constitute investment advice, an offer to sell, or a solicitation to buy, and should not be used as the basis or considered as an encouragement to engage in any investment whatsoever.