Two Rooms, Two Atmospheres The information presented in this publication is provided for informational purposes only and does not constitute investment advice, an offer to sell, or a solicitation to buy, and should not be relied upon as a basis or considered as an incentive to engage in any investment. The macro point There is no debate regarding what the European Central Bank (ECB) and the U.S. Federal Reserve will decide this week. Both will introduce a 25 basis point rate hike. However, uncertainty remains about what comes next. In the United States, the disinflation process is well underway. It wouldn’t be surprising if the central bank refrains from raising rates again later on. In the eurozone, disinflation is present but more complicated. Core inflation, for example, is still too high. The key issue this week is whether the ECB will decide on the rate hike debate currently surrounding September. Our expectations are low. We believe the ECB will keep all options open, just in case. On the economic front, the spotlight was on the United Kingdom last week. Consumer prices for June were anticipated. Economists expected a poor figure. Ultimately, it was a pleasant surprise. This primarily reflects how difficult it is to make reasonably reliable forecasts regarding inflation dynamics. In June, consumer prices reached a fifteen-month low at 7.9% year-on-year compared to 8.7% in May. This is obviously encouraging. However, there is a caveat: core inflation, which is the right measure for estimating inflationary pressures, remains too high at 6.9% year-on-year. The foreign exchange market is now divided on the outcome of the Bank of England (BoE) meeting scheduled for early next month. Before this publication, analyst consensus expected a 50 basis point hike. Now, 60% of surveyed analysts believe the BoE will only raise rates by 25 basis points. That’s not our view. We anticipate a 50 basis point hike accompanied by a slightly more dovish tone regarding the medium-term rate trajectory (specifically, moving from 50 basis points to 25 basis points in September). Why shouldn’t the BoE let its guard down? The disinflation dynamic is slow (as a reminder, this means inflation continues to grow but at a slower pace than before. This should not be confused with deflation). Wage growth is at a record level and shows no signs of weakening. Moreover, UK inflation remains the highest among G7 countries. In these circumstances, it’s hard to see how the central bank could suddenly decide to move to 25 basis points (particularly based on a single statistic!). It’s improbable. The foreign exchange market will need to adjust its expectations, which means there will likely be some movement on GBP pairs in upcoming sessions. In the United States, the growth dynamic is still positively oriented. The Atlanta Federal Reserve’s GDPNow indicator, which estimates real-time GDP evolution, shows a 2.4% annualized growth rate in the second quarter. This is a very solid figure after a 2% performance in the first quarter. In this context, it's difficult to see an immediate risk of recession. Financial markets have understood this well. They have adjusted their forecasts accordingly. Goldman Sachs now considers that there is only a 20% chance of the United States entering a recession. In other words, the soft landing scenario prevails. This obviously has implications for monetary policy. Last June, the foreign exchange market anticipated that the U.S. Federal Reserve (Fed) would lower rates within six months. Now, this is not expected for another ten months (thus 2024). It is clear that the monetary policy pause will be longer than expected in the United States. In Japan, nothing new under the sun. As expected, the central bank governor confirmed that there will be no short-term adjustment to monetary policy, particularly regarding the yield curve control system (which prevents an escalation in bond market borrowing rates). This puts an end to rumors. Indeed, for several weeks, operators have considered the possibility of monetary policy tightening, which had marginally supported the Japanese yen. From our viewpoint, Japanese monetary policy is on pause for at least the rest of the year, if not beyond. Let’s remember that the strategic review process for monetary policy (which assesses whether current measures are effective) is not expected to start for about a year. Until then, the underlying trend for the Japanese yen should be downward (though some fluctuations can be expected depending on geopolitical developments and market rumors that are common in the summer). Technical point The euro is once again favored by traders. But as we well know, when increases or decreases are of high amplitude over a short period of time, this is never durable and we end up having a rebalancing of operators’ positions. This is probably what will happen on EUR pairs (since the rise of the euro is not only against the US dollar but also, for example, against the Chinese yuan). In the medium term, we doubt that the EUR/USD will be able to sustainably escape the 1.1250-1.1300 zone. Therefore, it will be essential to consider hedging in the event of a short-term downward rebalancing of the pair. The supports and resistances displayed below indicate the respective lows and highs within which prices are expected to evolve during the week. Announcements to follow This is certainly the last really important week for the foreign exchange market before the August break (even though there are sometimes surprises in August). Whether in the United States or the eurozone, the consensus among analysts is for a 25-basis-point rate increase. This is already incorporated in the prices offered by the market. However, uncertainty remains high regarding the medium-term rate evolution. In the United States, the disinflation process is well underway. It wouldn't be surprising if the Fed ultimately decides not to raise its rates next September. We will certainly have more elements on this matter this week. In the eurozone, the situation on the inflation front is more complex. Consumer prices are falling. Producer prices are also down (in Germany, they slowed to 0.1% in June compared to 1% in May). There's no price-wage spiral. But core inflation remains too high and the decline in inflation is mainly due to falling energy prices while service inflation continues to spread. Members of the European Central Bank (ECB) argued last week for a pause after the July hike. But the minutes of the last meeting still indicate that a majority of Council members are arguing for a rate hike in September as well. We will certainly need to wait for more economic statistics to gain clarity on the future evolution of monetary policy in the eurozone beyond the expected increase this week. This implies that we are likely to see volatility on EUR pairs in the coming weeks. Below you will find publications and events expected to have a major impact on currency price developments.DayTimeCountryIndicatorWhat to expect?07/25/202310:00GERIFO Business Climate Index (July)Previous at 88.5.07/25/202316:00USAConference Board Consumer Confidence (July)Previous at 109.7.07/26/202320:00USACentral bank meetingConsensus: 25 basis point rate increase.07/27/2023714:15EURCentral bank meetingConsensus: 25 basis point rate increase.