Washington Changes Tool, Not Objective

The macro point

Since Friday, July 24, U.S. imports from 60 economies have borne an additional duty of 10% or 12.5%, due to insufficient prohibition of goods produced by forced labor. The rate depends on the partner's regime, not its geography: 10% for those already enforcing such a ban or committed to implementing one, 12.5% for others. But all this remains porous with a large list of exempted products.

Why did the market remain unmoved? Because there was nothing to discover: investigations opened on March 12, rates proposed on June 2, final action notified on July 23. A procedure under Section 301 can be seen coming from afar, and Brussels deemed the result compliant with the trade agreement concluded a year ago. What matters is the change of instrument. The Supreme Court invalidated in February the 'reciprocal' tariffs taken under an emergency powers law; the International Trade Court struck down others in May. One by one, fast tracks are closing. The only option left is Section 301: a long process, but no rate cap. Donald Trump opened a second one on Friday, on European digital regulation, after the €890 million fine imposed on Alphabet.

Should we, therefore, be alarmed? Not necessarily. For a European company, the rate remains at 10%, on largely exempted flows and within the framework of an already negotiated agreement. The eurozone seems to be holding up: the composite PMI index, which measures private sector activity, rose to 51.9 in July, above the 50 threshold that separates contraction and expansion, for the first time in four months.

Nevertheless, the PMI is a survey collected between July 9 and 22, and it was on the 23rd that the Middle East conflict changed theater: the Houthis claimed responsibility for the attack on two tankers on Thursday, then struck Saudi Aramco facilities in Yanbu on Saturday, the port through which Riyadh rerouted its exports since the near-closure of Hormuz. Two bottlenecks instead of one: Brent hit $102 on Thursday, the highest in eight weeks, thus reviving concerns related to the energy bill.

This weekend, Pakistan, supported by Beijing, however, revived the prospect of negotiations between Washington and Tehran and no strike was launched in the Gulf. At the market opening this Monday, September Brent fell 4.66% to $92.27, WTI 5.02% to $84.83. Nothing is resolved fundamentally, neither at Hormuz nor in the Red Sea, and this war premium will rebuild as quickly as it dissipated. The lesson from these four sessions is not the oil barrel level, it's its amplitude: thirty dollars gained in three weeks, ten given back in three days.

Technical point

Three weeks that the euro struggled against the same ceiling: it broke on Thursday, following the ECB, and the breakout happened on the downside with EUR/USD closing around $1.1375 on Friday, down about 0.6% on the week. The most interesting signal is on the other side of the pair: the dollar index registers its highest close in fifteen months, around 101.50, i.e., exactly on a long-term resistance located around 101.39. This is the turning point of the week. A clear breakthrough would open the way to a euro below 1.13; a rejection, more likely according to us given the extent of the movement already accomplished, would bring the pair back to 1.1450.

The yen trades around 163.80 against the dollar, the lowest in nearly forty years, and non-commercial speculative positions remain heavily short. At this level of saturation, an intervention from Tokyo, a disappointing U.S. statistic, or a firmer-than-expected Bank of Japan on Friday would suffice to trigger a disorderly unwinding, with the market viewing the 162-163 zone as the sensitivity threshold of Japanese authorities.

Note that volatility compressed last week (only 7% of notable pairs moved by more than 1%), just before three central bank decisions in three days.

The supports and resistances shown below respectively indicate the lows and highs within which the prices should move during the week.

Announcements to follow

Three central banks in three days, and most of the month's macro data concentrated over forty-eight hours. The Fed decides Wednesday, July 29: the status quo in the 3.50 – 3.75% range remains the majority scenario, but the possibility of an increase is no longer marginal, the market is pricing in nearly 80% probability of at least a 25 basis point tightening by September. Monday's oil decline removes some urgency from this debate without concluding it. It is Kevin Warsh's press conference at 8:30 PM that will set the tone. The Bank of England follows Thursday, the Bank of Japan Friday, in a context of a historically weak yen and saturated short positioning.

On the eurozone side, two publications really matter. The second quarter GDP on Thursday: the consensus expects +0.2% after a 0.2% decline in the first quarter, which would rule out two consecutive negative quarters, in other words, no technical recession. Then the July flash HICP on Friday, expected to slightly increase to 2.9% year-over-year against 2.8% in June, with a stable core component at 2.4%. A figure above the consensus would validate the scenario of an ECB hike in September and support the euro.

Summer Break. This edition is the last before the August break. The Currency Weekly will resume on Monday, August 24. Until then, our teams remain reachable during regular hours for your foreign exchange transactions and hedging arrangements.

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