We No Longer Know Whom to Believe The information presented in this publication is provided purely for informational purposes and does not constitute investment advice, an offer to sell, or a solicitation to buy, and should not be used as the basis or considered as an inducement to engage in any investment. The macro point Since 2008, central bank communication (forward guidance) has been a stabilizing factor in financial markets, including the foreign exchange market. Now, we no longer know whom to believe. In June, the US Federal Reserve (Fed) increased its key interest rate by 75 basis points. However, its chairman, Jerome Powell, had insisted until the last moment that he intended to proceed with a 50 basis point hike. It is now the turn of the European Central Bank (ECB) to discard forward guidance. The cost of money in the eurozone was increased by 50 basis points last Thursday. Less than ten days ago, Olli Rehn, Governor of the Bank of Finland (close to Christine Lagarde), considered that a 25 basis point increase would be an appropriate first step. The de facto end of forward guidance means that monetary policy will be less predictable in the short term, increasing volatility across all financial assets and currencies, of course. Adopting an appropriate currency hedging strategy is more than essential. It is a way to protect against excessive volatility. It is also a way to save money, which is significant during a period of high inflation (production costs in France have risen by nearly 28% over a year according to the latest figures). The economic context continues to deteriorate as well. Real estate is a major growth driver across the Atlantic. Housing starts slowed significantly in June, to 1.5 million. It's the lowest figure since September 2021. Demand is decreasing sharply both due to a record average home price and a rapid increase in mortgage rates in just a few months. For now, the Fed does not seem concerned. But if the real estate bubble deflates brutally, the US economy is sure to fall into recession. This is not our central scenario at the moment. However, it is a risk to consider. Increasingly, the question arises whether the Fed is doing too much, too quickly in its current monetary tightening. The foreign exchange market is skeptical about the Fed's ability to increase rates over time. Analysts are betting on a pause in the hike cycle as early as next February. Finally, political risk is returning in the eurozone. It was expected. Italy is heading towards early general elections in September or October (the date has not yet been set). Prime Minister Mario Draghi decided to step down after losing the support of his main ally, the Five Star Movement. This is not good news for the eurozone. It is not good news for the euro either. However, it is unlikely that we are heading towards a new sovereign debt crisis (as was the case in 2012). Two things have changed over ten years. The European banking sector is healthier and consolidated. Spanish banks are not fragile, for example. The two main systemic banks in Italy have strong balance sheets. The five smaller banks are fragile. But this is not enough to trigger a banking panic at the eurozone level. Moreover, the ECB has learned from its mistakes. Last Thursday, Lagarde unveiled a comprehensive anti-fragmentation tool aimed at preventing some member states' borrowing costs from soaring due to speculative panic. This is the TPI, or Transmission Protection Instrument. The countries that can benefit from it will have to meet a number of criteria (such as debt sustainability and not being in excessive deficit procedure). However, these criteria are ultimately not very binding. We understand that the ECB intends to have the flexibility to intervene whenever financial tensions arise. The eurozone faces many challenges: energy crisis, persistent inflation, social tensions, political crisis in some member states, exposure to the war in Ukraine, etc. The good news is that it is better equipped to face them than in 2008 (global financial crisis) and 2012 (debt crisis). On the foreign exchange market, the euro has fallen by nearly 11% against the US dollar since the beginning of the year. In the short term, the trend is bearish as long as the pair fails to break the resistance at 1.0350. It is uncertain whether it will be able to do so soon. There are almost no upward catalysts for the euro at the moment. Technical indicators and fundamentals support a lasting decline of the single currency and a new test of the parity zone. The major support to watch in the coming weeks is located at 0.9985. We do not anticipate any major changes in the short term for the EUR/GBP pair, which should continue to trade within a wide range between 0.84 and 0.86. However, there could be a resurgence of volatility on the EUR/JPY pair over the summer. The USD/JPY remains at a very high level (around 138 and up nearly 20% since January 1), which could prompt the Bank of Japan to intervene in foreign exchange to support the currency of the archipelago. It's a possibility that has been on the table for several months and might finally materialize. As a result, an intervention in foreign exchange could lead to a drop in EUR/JPY. The support level at 137.71 will be closely monitored in this case. The supports and resistances shown below indicate respectively the lows and highs within which the rates are expected to evolve during the week.SUPPORTSWEEKLYRESISTANCESWEEKLYS2S1R1R2EUR/USD0.97870.99851.03501.0578EUR/GBP0.82640.83910.86450.8772EUR/CHF0.95990.96570.99961.0150EUR/CAD1.27771.29741.33691.3566EUR/JPY137.71139.00143.59146.54The Fed's monetary policy meeting is the highlight of the week. It is the last central bank meeting of a major developed country before the Bank of England's meeting scheduled for August 4. Powell has hinted that a 75 basis point increase is on the table. But as we have seen, blind trust in central bank communication is now difficult. Several market players expect a 100 basis point increase. It is not excluded. Inflation in the United States is still too high (the consumer price index rose to 9.1% month-on-month in June). There is a decline in core inflation (excluding energy prices). But it is still too weak to indicate that the inflation peak is near. The Fed has likely understood that its window of opportunity to tighten monetary policy is narrowing due to the ongoing economic slowdown. It is probable that it wants to be more aggressive in the short term. Regardless of the scale of the rate hike this week (75 or 100 basis points), we remain convinced that the upward trend of the US dollar against its major counterparts (including the euro) continues in the short and medium term. The dollar index (which measures the greenback's performance against the currencies of the United States' main trading partners) has risen by 11.56% since January 1 of this year. According to us, this is just the beginning. August will be quiet in terms of macroeconomic indicators and central bank meetings (as every year). This does not mean that there will be no unexpected volatility spikes in foreign exchange. The Bank of England will be the only central bank of a major developed country to meet. Governor Andrew Bailey indicated that an increase of at least 50 basis points is possible. It is partly priced into the pound sterling. Inflation is the number one problem across the Channel. It is out of control. It should quickly exceed the psychological threshold of 10%. Some countries are heading towards a lasting impoverishment of their population due to the general rise in prices. This is less the case in France where inflation is rising but is among the lowest in the eurozone (just behind Malta). Moreover, redistribution mechanisms help avoid too much impoverishment of the first income quintile (the 15 to 20% poorest of the population). We will have the opportunity to discuss inflation very soon. It is the theme of the year 2022. As every year, we take a break in August. Mondial Change's Currency Weekly returns on September 5. Thank you for your loyalty. Very happy holidays from all of our team. You will find below the publications and events that should have a major impact on the evolution of currency rates.DAYTIMECOUNTRYINDICATORWHAT TO EXPECT?25/0710:00IFO Business Climate Index (July)Rise to 92.9 against 92.3 previously.26/0716:00Conference Board Consumer Confidence (July)Expected decline to 98.5 against 98.7 previously.27/0720:00Central bank meeting. J. Powell's press conference from 20:30At this stage, the foreign exchange market anticipates at least a 75 basis point hike in the main policy rate.28/0714:30GDP for the second quarterThe US economy is expected to avoid recession at the start of the year with GDP growth in Q2 projected at 0.9%.29/0711:00Consumer Price Index (July)Painful new increase to 8.8% after 8.6% in June.04/0813:00Central bank meetingAt this stage, the foreign exchange market expects a 50 basis point increase in the policy rate05/0814:30US Employment Report (July)Previous: 372,000 job creations and unemployment rate at 3.6%.01/0914:15ADP Employment Survey (June)ADP has revised its methodology. The survey for the month of June was to be published in July. It is finally in September. The consensus expects 200,000 job creations.