The Big Return of Volatility
The return of volatility in financial markets is the defining phenomenon of this beginning of the year. For now, it concerns stocks more than Forex. But we doubt currencies will stay unaffected for long. How to explain this resurgence of volatility? Geopolitics? No. In our view, it is mainly related to the fact that hedge funds, which take short-term positions on the market, play an increasingly vital role in price formation. Recent studies show they contribute to 25% of traded volumes on stocks...and 60% on FX derivatives. That's huge. The problem is, they often use leverage. Last year, it averaged x2.98 – higher than in recent years. But this hides significant disparities. For example, the average leverage of macro funds (which base their strategy on studying the economic cycle) is x9. When everything is going well, this supports markets and increases stock prices. But when confidence erodes, it can cause markets to drop sharply and significantly increase volatility, particularly on currencies. In the era of financial globalization and the rise of algorithms, it would be wrong to think that what's happening in stocks won't have consequences on currencies. For example, the rise of the US dollar in early February was mainly linked to panic in American tech stocks, especially the software segment, perceived as the most vulnerable to the rise of artificial intelligence. Faced with renewed risk aversion, the dollar played its role as a safe haven until the crisis subsided.
The macro point
Ultra-accommodative monetary policies by central banks had erased volatility. It is back. This is not due to increased geopolitical risk. It is related to the very structure of financial markets. They are now dominated by algorithms, which operate on a flow logic in a high leverage context. This means we will likely have to get used to increasingly frequent volatility spikes on currencies in the future.
In the future, we expect the currency market to be increasingly contaminated by what's happening in stocks and bonds. We are facing technical markets, dominated by flow logic and with high leverage (which has been rising in recent years). In our opinion, we will have to get used to increasingly frequent and sudden volatility spikes that can disappear as quickly as they appear. This is a new reality for companies that must also consider this new factor in their currency hedging strategy.
Technical point
Fortunately, some currencies are more stable than others. This is the case for the Chinese yuan, which is managed by Beijing. The currency is in the process of adjusting against both the US dollar and the euro. Last week, it reached a low since May 2023 against the greenback. This confirms once again that Chinese authorities are not seeking to devalue their currency, which is already at a very low level. It would be suicidal. The triple devaluation of summer 2025 left scars for several years.
Watch out as this could have an effect on the yen. The Japanese government is considering tapping into the country's abundant foreign exchange reserves to finance the massive stimulus plan presented in November and to avoid a surge in long-term debt rates. This is not yet finalized. But it's an idea mentioned by the Japanese Finance Minister a week ago. It's hard to know exactly what impact this would have on the Japanese currency. For now, the trend is still clearly bearish against both the euro and the dollar. We maintain our target for EUR/JPY at 190.
Finally, a word on emerging currencies showing impressive resilience, especially those of Latin America. Take the Colombian peso. It is up 2.30% against the euro since the beginning of the year. Two factors played a role. First, the Colombian central bank raised its key rate by 100 basis points at the beginning of February to counter the inflationary effects of a surprise local minimum wage increase. Additionally, many foreign investors have decided to invest in emerging market stocks. These constant capital flows increase demand for local currencies and thus raise their exchange rate. Brazil's case is exemplary. In January, more than 2.3 billion dollars of capital flows entered Brazilian assets. Over the same period, the Brazilian real increased by 4%. The year 2026 should be the year of emerging currencies!
The supports and resistances displayed below indicate respectively the lows and highs within which the rates should evolve during the week. | Weekly Supports | | Weekly Resistances | |
|---|
| S2 | S1 | R1 | R2 |
| EUR/USD | 1.1688 | 1.1790 | 1.2040 | 1.2200 |
| EUR/GBP | 0.8545 | 0.8590 | 0.8733 | 0.8748 |
| EUR/CHF | 0.9059 | 0.9100 | 0.9288 | 0.9332 |
| EUR/CAD | 1.5848 | 1.5900 | 1.6190 | 1.6294 |
| EUR/JPY | 180.88 | 181.22 | 185.44 | 186.00 |
Announcements to follow
The economic calendar for the week is almost empty, with only a few American statistics, but they are not prominent. However, expect a decline in Forex trading volumes due to a holiday Monday in the United States (Washington's Birthday) and the Chinese New Year all week. It is therefore possible that there will be erratic movements in some currency pairs, especially if the news is anxiety-inducing. Caution.
Below you will find the publications and events expected to have a significant impact on currency exchange rates.| Day | Time | Country | Indicator | What to expect? |
|---|
| 02/19/2026 | 14:30 | USA | Philadelphia Fed Manufacturing Index (February) | Previous at 12.6. |
| 02/20/2026 | 14:30 | USA | First Estimate of Q4 GDP | Previous at 4.4% year on year. |
| 02/20/2026 | 15:45 | USA | Manufacturing PMI (February) | Previous at 52.4 (expansion phase) |
The information presented in this publication is provided purely for informational purposes and is neither an investment advice, nor an offer to sell, nor a solicitation to purchase, and should under no circumstances serve as a basis or be considered as an incitement to engage in any investment.