Macro FX Report: Central banks step out.

Global Context:

• The FED remains undecided between fighting inflation and supporting employment, favoring a strong dollar driven by energy.
• The ECB adopts a cautious stance, monitoring an exogenous inflationary shock linked to energy dependence.
• Japan and the United States have carried out an unprecedented intervention to support the yen in the face of a historic drop.
• The British pound remains under pressure, torn between expectations of high rates and risks of a slowdown.
• The Swiss franc is establishing itself as the new preferred funding currency, dethroning a yen that has become too volatile.

Calendar for the upcoming week (key events):

Horacle Hub Direction :

USD:

FOMC Recap:

This week the FOMC took place, the highly anticipated meeting for traders and investors around the world. During this meeting, the FED (US central bank) decides on interest rates and future economic policy. This week (Wednesday), the FOMC was platonic on the surface. Platonic because, at first glance, there was no rate change. But on a deeper level, the FED chairman no longer wants to provide forward guidance. The FED is torn between reigniting inflation with a rate cut, or amputating the labor market’s momentum by raising rates. Because as a reminder, the FED has a dual mandate: inflation/unemployment. The real risk here is a timing risk, even though growth was solid ex-ante, as subsequent publications showed a net decline in GDP (GDP → 1.5% vs 2.3% expected).

The FED’s credibility is being called into question regarding its actions to fight inflation. Nevertheless, the dollar should continue to outperform, as long as energy prices maintain their bullish momentum (demand seasonality).

(We will discuss the US intervention in the YEN market in the dedicated Japan section below.)

EURO:

The Eurozone also had its share of monetary policy this week, with the ECB meeting, which also remained neutral on key rates. However, unlike the US, the Eurozone lacks energy sovereignty and is experiencing growing inflation due to the Middle East conflict, a pure exogenous shock…

To keep it brief, the ECB remains in a hawkish position and is closely monitoring the risks of a “second round” effect on inflation, which could take place in wages and non-energy prices. As a result, it is adopting a data-dependent, meeting-by-meeting policy. The trigger for future action will be the persistence of the energy shock. If it proves durable and anchors inflation expectations above 2%, it will have to tighten further. If it eases, it can begin to consider cuts.

The rise in the spread to a high since late 2024 thus signals a reversal of this trend: US real rates are rising relatively faster than European ones, or European rates are falling relatively faster. The correlation between the 2-year real rate spread and the exchange rate is mechanical: a widening spread favors the dollar and weighs on the euro. Movements in the “2-year swap rates” are the main driver of variations in EUR/USD. Every basis point of difference translates into pressure on the parity.

JPY:

The US Treasury intervened in the foreign exchange market on Friday, August 1, 2026, to support the Japanese yen, marking the first time since 1998 that Washington and Tokyo have acted jointly to directly buy the Japanese currency.

The yen had touched its lowest level against the dollar since 1986, approaching ¥164, under pressure from several factors: the rise in oil prices linked to the war in Iran, concerns about Prime Minister Sanae Takaichi’s expansionary fiscal policy, and the Bank of Japan’s slowness to raise its rates.

Recap of the Bank of Japan’s forecast report:

The Japanese economy slows down in 2026 under the effect of rising oil prices, but remains supported by global AI-related demand, government measures, and accommodating financial conditions. A moderate recovery is expected starting in 2027.

The CPI will significantly exceed 2% from the second half of 2026 (driven by energy, the weakness of the yen, and semiconductor prices), before dropping back to 2% at the end of the horizon. Core inflation is expected to stabilize around the 2% target between the end of 2026 and 2027.

Labor shortages persist. The virtuous wage-price cycle is strengthening, and medium/long-term inflation expectations continue to rise.

The BoJ will continue to raise its key rates to adjust the degree of accommodation, while carefully monitoring data (geopolitics, AI, foreign exchange) in order to anchor inflation around 2% without causing a derailment.

GBP:

The pound sterling is currently supported by expectations of high interest rates and a geopolitical risk premium, but the BoE believes the market is going too far. The main downside risk for the GBP is that inflation figures disappoint (or growth collapses), forcing the BoE to cut rates faster than expected, which would cause a sharp drop in the pound. Conversely, an escalation of the conflict (adverse scenario) would force the BoE to raise its rates, propelling the GBP to new heights, but at the cost of a severe deterioration in activity.

CHF:

The Swiss franc is progressively dethroning the Japanese yen in the funding currency market. Historically, the JPY was the preferred currency to borrow at low rates, but the Bank of Japan recently began a rate hike cycle, making the cost of borrowing in yen less attractive. Furthermore, the BoJ regularly intervenes in the market to support its currency, creating unpredictable exchange rate risk for investors. In contrast, the Swiss National Bank (SNB) maintains very low key rates (among the lowest in developed countries) and almost never intervenes to weaken the CHF. Result: borrowing in CHF is cheaper than in JPY, and above all, it eliminates the fear of a sudden appreciation of the yen due to intervention. The CHF is thus becoming the ultimate “carry currency”.