Puzzle The information presented in this publication is communicated purely for informational purposes and does not constitute investment advice, an offer to sell, or a solicitation to purchase, and should under no circumstances serve as a basis or be considered an incentive to engage in any investment. The macro point PuzzleThe Macro PointLast week was marked by very dense economic news and an unexpected return of volatility in both major and exotic currency pairs on the foreign exchange market. The return of volatility is explained by the 'hawkish' tone of the U.S. Federal Reserve. While everyone expected the U.S. central bank to adopt a cautious tone regarding inflation and the evolution of monetary policy, it clearly opened the door to a future increase in interest rates and the initiation of discussions about tapering. The Federal Reserve now anticipates two rate hikes in 2023, whereas it was previously expecting to maintain rates at their current level at that same timeframe just three months ago. It also appears increasingly evident that deep disagreements exist among FOMC members regarding the approach to monetary policy and the analysis of inflation trends. Similar divergences can be observed within the European Central Bank, albeit to a lesser extent. Divergence suggests that U.S. monetary policy might be a bit less predictable in the short term than it has been in the past. For the foreign exchange market, this could result in a sustained increase in volatility, but it is clearly too early to be certain.We continue to believe that the inflation surge will be temporary. We are not at all facing an inflationary risk similar to that of the 1970s. Taking into account the evolution of the Consumer Price Index and wages in the United States over the past two years, we remain well below levels observed over the long term. Furthermore, wages have not yet returned to their pre-Covid levels. The risk for the Federal Reserve would be facing a longer-than-expected rise in inflation while the economy shows signs of slowing down. Everything is far from perfect, for example, in the labor market. Weekly unemployment claims published last week increased to 412,000 for the week ending June 12, while the consensus expected a decline. This is not the first time in recent months that labor market figures have been disappointing. If the economy were to slow down in a context of high inflation (it is wrong at this stage to speak of 'stagflation'), what trade-off will the Federal Reserve make? Will it prioritize its mandate of price stability or its mandate to fight unemployment? It is too early to say. Technical point In the short term, currency traders consider that the "hawkish" stance of the Federal Reserve is favorable to the U.S. dollar. The dollar index, which we often discuss in our weekly newsletter, jumped nearly 200 points in just a few days. The strengthening of the U.S. dollar is noticeable against the euro. The EUR/USD pair is close to its mid-April lows and shows a weekly decline of nearly 2%! Against emerging currencies, the rise of the dollar is even more pronounced. Almost all major emerging currencies have been plummeting in recent sessions, except for the Brazilian real BRL (which is highly overvalued). For example, the USD/MXN (U.S. dollar/Mexican peso) pair increased by 1.8% in just last Wednesday’s session, the day of the U.S. central bank meeting. It had been a very long time since such volatility was observed across entire sections of the forex market – at least regarding USD pairs. For EUR pairs, volatility remains lower. This is evidenced by the evolution or rather the stagnation of the EUR/GBP within the corridor between 0.85 and 0.87, where the pair has closed more than 90% of sessions over the past four months. On a weekly basis, the EUR/GBP shows a rise of 0.08%. The supports and resistances below indicate the low and high points within which the rates should evolve during the week.SUPPORTSWEEKLYRESISTANCESWEEKLYS2S1R1R2EUR/USD1.16001.17001.21601.2336EUR/GBP0.84200.84480.86250.8671EUR/CHF1.08171.08441.10581.1095EUR/CAD1.44611.45981.48481.4979EUR/JPY128.00129.85133.49134.17For personalized advice on trends and foreign exchange hedging, contact our trading desk: Announcements to follow There will still be a very dense economic news flow this week (particularly with several German figures and the Bank of England meeting), but it is certainly not what will really matter. The forex market will continue to digest the U.S. central bank's remarks, which should lead to a more significant strengthening of the U.S. dollar. Special attention should be paid to the EUR/USD pair, which has breached several important supports in just a few days and now seems set to reconnect with 1.16. In the short term, volatility might still be present on the pair – hence the need to consider adopting an appropriate hedging strategy. Below are the publications and events that should have a major impact on currency rate evolution.DAYTIMECOUNTRYINDICATORWHAT TO EXPECT?06/2114:30Chicago Fed National Activity Index (May)Previous at 0.24.06/2216:00Existing Home Sales (May)Consensus at 5.75M versus 5.85M previously.06/2309:30Manufacturing PMI (June)Consensus at 65.9 versus 64.4 previously.06/2410:00IFO Business Climate Index (June)Consensus at 98.2 versus 99.2 the previous month.13:00Central bank meetingNothing expected. The key rate should be maintained at 0.10%.Did you like this content? Share it!