Back to the Beach The information presented in this publication is communicated for purely informational purposes and does not constitute investment advice, an offer to sell, or a solicitation to buy, and should in no way serve as a basis or be considered as an incentive to engage in any investment. The macro point Harsh return to reality for EUR/USD. Yes, the Fed will certainly take a pause in monetary policy while the ECB may continue to raise its rates, at least in the short term. But it is not the monetary policy differential that will be the main marker for the EUR/USD pair in the second half. It will be the growth differential. On the American side, growth is resilient. On the eurozone side, recession looms. The market has been too optimistic in recent weeks about prospects for the euro. In reality, they are not at all promising. Hence the marked drop in the euro last week.You can leave with peace of mind to the beach. The major central bank meetings are almost all behind us. There weren't many surprises from the US Federal Reserve (Fed) and the European Central Bank (ECB). In both cases, the rate increase was around 25 basis points (as expected). In both cases, the door is open for an additional rate hike in September. However, there is a significant difference: the door is only slightly open in the United States while it is wide open in the eurozone. On the American side, the disinflation process is well underway (with inflation now close to the target) and economic growth remains strong. The Fed has no interest in trying to jam this well-oiled machine by making an unnecessary rate hike. This is precisely what the forex market has understood. Following the Fed meeting, the market is counting on a pause in monetary policy that will last until March 2024. Only then could the Fed start a rate-cutting cycle (depending on the evolution of the situation). Obviously, these expectations are subject to change. But it shows that no one expects, barring a last-minute accident, a new monetary tightening. This naturally leads to significant impacts on exchange rates. We'll come back to this in a moment.On the eurozone side, the situation is more complicated both in terms of inflation and growth. The ECB has clearly indicated that the level of inflation is still too high even if there are encouraging signals. We can't contradict her on this point. Hence the very strong possibility that the ECB will decide to raise its key rate at least once more next September. However, this is not unanimous among economists and analysts. The latest figures on activity and credit developments in the eurozone are in the red, raising fears of a recession. In June, activity in services (which was still a resilient segment and a strong growth provider) collapsed in the main countries. Consumer surveys show that households have a reduced spending capacity. Added to this is an almost halt in credit distribution in the eurozone. The ECB's credit survey shows that the rate hike is starting to bite on investment production in the eurozone. Corporate credit demand continues to fall and much of this decline is driven by lower investments. It is certainly not glorious for future growth which is closely dependent on present investment. Moreover, the situation in Germany continues to deteriorate. The business climate measured by the Ifo institute deteriorated in July for the third consecutive month. Apart from the Covid peak, the situation across the Rhine has not been judged so negatively since 2010 (when Europe was facing a banking crisis that turned into a sovereign debt crisis). This sets the scene. Even if another rate hike in the eurozone seems necessary given the high inflation, it risks causing highly undesirable consequences in terms of economic activity and precipitating the eurozone into recession.A little less than a year ago, the central scenario on the forex market was that of a recession in the United States. Ultimately, this will not happen in the short term. Even the Fed now excludes a recession. However, it is indeed the eurozone that is once again flirting with this risk. Even if we manage by miracle to escape a recession, we are certainly doomed to endure a period of impoverishment (sluggish growth) accompanied by inflation that is trend-wise higher than in the United States (even though we must recognize that the methods of calculating inflation differ on both sides of the Atlantic). Technical point The Fed meeting confirmed certain anticipations of the foreign exchange market. Traders are betting on a monetary policy pause. If this is the case (and it is objectively the most probable scenario), it would be one less supporting element for the US dollar. This could relieve certain currencies that are declining because their monetary policies are accommodative (Chinese yuan, Japanese yen). We are already observing a repricing at work on the side of emerging currencies, with a rise against the US dollar. The EUR/USD pair is a special case. As we indicated in recent weeks, the market was certainly a little too optimistic about the prospects for the euro. The latest indicators in the eurozone underline (unsurprisingly) that growth will be less well-directed than in the United States. The growth differential (and no longer monetary policy) could be the main marker for the EUR/USD pair in the second half of the year. The supports and resistances displayed below respectively indicate the low and high points within which the rates should evolve during the week. Announcements to follow It is the last important week before the summer break. On the agenda, the Bank of England (BoE) meeting this Thursday. It's the event of the week. According to the latest survey conducted by Reuters, 42 out of 62 economists polled expect a 25 basis point hike. Only 20 of them anticipate a 50 basis point hike. For once, we are in the minority. We think the BoE will continue to strike hard given the level of inflation. A 50 basis point hike this week would make sense before slowing the pace of rate hikes to 25 basis points in September. Even though there is quite high uncertainty regarding the outcome of the meeting, it is unlikely that the EUR/GBP pair will move much. In recent years, this pair is almost in a state of near-irrelevance. We will also have to look at the employment figures in the United States in July. The ADP survey published on Wednesday is of no interest. Only the official report from the Department of Labor is observed by traders and the Fed. The goal is to have confirmation of the slowing labor market, which would validate the scenario of a monetary policy pause. As every year, we take a break in August. It is an opportunity to thank you warmly for your loyalty. We will meet you again, with a bit of impatience, on September 4! Below you will find the publications and events that should have a major impact on the evolution of exchange rates.DayTimeCountryIndicatorWhat to expect?02/08/202314:15USAADP Non-Farm Employment Change (July)Previous at 497k. Low correlation with the official employment report (even less since the recent change in methodology)03/08/202313:00UKCentral bank meetingOur opinion: increase of the main interest rate by 50 basis points and then 25 basis points in September.04/08/202314:30USADepartment of Labor Employment Report (July)Previous at 209k.10/08/2023714:30USAConsumer Prices (July)Previous at 3% year-over-year.11/08/2023714:30USAProducer Prices (July)Previous 0.1% month-over-month.