USD momentum & Hawkish tone

1. Macro Models & Sentiment (Market Conviction)

2. Volatility Target Sizing

3. Macroeconomic Context

Foreign Exchange Market (Forex)

USD

The dollar maintains its dominant position, supported by a favorable interest rate differential and attractive deposit rates. Expectations of monetary tightening for the year have however been revised from 43 to 31 basis points. Although Fed Chairman Kevin Warsh maintains a hawkish bias linked to energy inflationary pressures, his recent statements at the Sintra forum suggest a moderation of risks. As a result, the probability of a rate hike in September has dropped from 65% to 50%.

The establishment of a ceasefire paradoxically coincided with an increase in oil prices. In the absence of new geopolitical shocks, market attention will focus on the rate differential, whose comparative advantage for the greenback seems to be eroding (cf. EUR/USD).

The temporary rise in barrel prices led to selling pressure on the USD/AUD, USD/NZD, and USD/CAD pairs, with a notable underperformance of the New Zealand dollar (Kiwi).

EUR

The EUR/USD pair is stabilizing under a pivot resistance at 1.1475. Probabilities of a monetary adjustment by the ECB in September are declining below 50%. However, the rhetoric of Isabel Schnabel and Philip Lane remains cautious in the face of persistent underlying inflation and the risks of second-round effects. Political positioning ahead of the 2027 presidential election revives concerns about fiscal stability. This risk factor weighs on the perception of the eurozone and accentuates the pressure on OAT yields.

From the point of view of last week’s releases, Germany offered an outperformance in industrial production (+0.9% vs +0.1% expected) and a strengthening of the trade surplus to +19.1 billion. France, on the other hand, has a trade balance with a persistent deficit of -6.9 billion.

GBP

Fiscal uncertainty linked to the new finance team is weighing on Gilts. Nevertheless, the low summer volatility and the covering of short positions led to a technical breakout on EUR/GBP which we must take seriously, and which could significantly continue this week.

Real Estate Indicators The RICS index (-33%) confirms the sluggishness of the sector, despite a marginal progression of the Halifax HPI index (+0.2%).

JPY

The Japanese currency is under structural pressure. The USD/JPY pair crossed the 162 threshold, an unprecedented level in 45 years, following the JOLTS releases. The risk of intervention by Japanese authorities via their foreign exchange reserves constitutes the main variable of asymmetric volatility in the short term.
The releases are moderate, with “Wages and Consumption” progressing thanks to wages (+3.2%) lower than expected. Resilience of household consumption (-0.4% vs -2.3% expected). On the other hand, we note a strong acceleration in machine tool orders (+52.8% year-on-year).

CAD

The appreciation of oil prices supports the Loonie, favoring a correction against the USD. The restrictive stance of the Bank of Canada reinforces expectations of tightening by the end of the year, confirming the outperformance of the CAD.

CHF

The Swiss franc retains its safe-haven status. “Market Conviction” models identify bullish configurations on GBP/CHF and USD/CHF, driven by carry trade strategies optimized for risk.