The first issue concerns the persistent strength of the US economy. Figures released this week significantly exceeded expectations. May job creations came in at +172,000 against only +85,000 expected, while revisions to previous months added a further 93,000 jobs. JOLTS job openings rose to 7.62 million, their highest level in a year, and the manufacturing ISM climbed to 54, its best level since May 2022. In other words, contrary to the fears of a slowdown observed in the spring, the labor market is strengthening once again.

This economic resilience is excellent news for growth, although it is becoming problematic for financial markets. Simultaneously, inflationary pressures continue to build. The oil shock relating to the Strait of Hormuz is keeping energy prices high, while several price indicators remain on an upward trend. As a result, bond markets are beginning to price in not rate cuts, but potentially another Fed hike by the end of the year.

This is probably the most significant regime shift observed this week. After several months dominated by expectations of monetary easing, investors are starting to consider a scenario where the Fed might actually be forced to further tighten policy to contain inflationary pressures and cool the rise in long-term rates. The 2-year Treasury yield subsequently jumped 10 basis points after the jobs report.

At the same time, valuations are reaching demanding levels. Expected earnings for the S&P 500 are still growing by nearly 27% y-o-y, an exceptional performance by historical standards. However, this growth remains concentrated in a limited number of AI and tech-related stocks. Barely 4% of S&P 500 components are hitting new all-time highs, a level comparable to that seen during certain phases of extreme concentration in the past.

The other major risk remains oil. Executives from Exxon and Chevron have warned that without a swift agreement in the Middle East, the market might have to price in a $150-per-barrel scenario, due to extremely low global inventories. For now, investors continue to view this threat as temporary. However, the longer the Strait of Hormuz remains partially blocked, the greater the risk of a lasting shock to global growth.

The dominant scenario therefore remains one of a robust US economy, but this very robustness reduces the chances of rapid monetary easing. For markets, the danger is no longer an immediate recession, but rather the combination of persistent inflation, rising long-term rates and already very stretched valuations.

Technically, the EUR/USD has broken below 1.1600 while the Dollar Index has cleared 99.45. Ultimately, the bearish dollar scenario has fallen through, and a test of 100.64/101.15 is to be feared. A close above this threshold would pave the way for a more substantial dollar rally with 104.05/60 in sight. Alongside this means the Euro would first seek 1.1410 before considering 1.1177/30. Elsewhere, USD/JPY has returned to contact 160.70, while USD/CHF is breaking above 0.7905/36 to open up 0.8040, a pivot point for a medium-term bullish dollar scenario with a target of 0.8200. Regarding commodity currencies, the Aussie has broken below 0.7100 for a continued consolidation toward 0.7020/6910, while the Kiwi has also broken equivalent support at 0.5815, opening the way to 0.5680.