Nick Goold
July and August can sometimes be quieter as many traders take holidays. However, lower trading activity can also cause markets to react more sharply when important news is released.
Understanding the main macro themes can help traders identify potential opportunities, choose which markets to focus on, and better understand why prices are moving.
For more on how summer conditions can affect volatility, read last week’s article:
Why Summer Markets Are Different: A Trader’s Guide to Seasonal Conditions.
1. Yen Weakness and Intervention Risk
The yen remains weak because US interest rates are much higher than Japanese rates. This encourages investors to borrow cheaply in yen and invest in higher-yielding US dollar assets. A strong dollar and higher oil prices are also adding pressure. Japan imports most of its energy, so rising oil prices increase demand for foreign currencies.
Market scenarios
If the BOJ remains cautious and US yields stay high:
- USD/JPY may continue rising.
- EUR/JPY and GBP/JPY may also remain supported.
- A weaker yen may help the Nikkei because it benefits exporters.
If Japan intervenes:
- USD/JPY could fall sharply.
- Other yen crosses may also reverse lower.
- The Nikkei may weaken as the yen strengthens.
If the BOJ signals faster rate increases:
- The yen recovery may last longer.
- USD/JPY could move significantly lower.
Intervention may create a sharp move, but it may only be temporary unless interest-rate expectations also change.
2. Iran Escalation and Higher WTI Prices
The main risk from the Iran conflict is disruption to oil production or important shipping routes such as the Strait of Hormuz and the Red Sea. If supply is threatened, WTI could rise quickly. Higher oil also increases inflation and may make it harder for the Federal Reserve to lower interest rates.
Market scenarios
If the conflict escalates:
- WTI may break higher.
- The US dollar may strengthen.
- USD/JPY may rise as higher energy costs hurt Japan.
- The S&P 500 and Nasdaq may weaken.
If tensions ease:
- WTI may fall sharply.
- Inflation concerns may decline.
- The dollar and USD/JPY may weaken.
- The U.S. and Japanese stocks may rise.
3. AI Valuation Correction
AI and semiconductor shares have risen strongly, but investors are now questioning whether prices have moved too far ahead of earnings. Large technology companies are spending heavily on chips, data centres and AI infrastructure. The main question is whether future revenue will justify this spending. Cheaper Chinese AI models have also raised doubts about whether companies need to continue buying the most expensive technology.
Market scenarios
If technology earnings remain strong:
- The Nasdaq may recover.
- Risk appetite may improve.
If AI spending remains high but profits disappoint:
The Nasdaq and other stock indices may fall.
4. Central Banks and Inflation
Central banks must balance higher inflation against the risk of weaker economic growth. The Federal Reserve may keep rates high if oil prices and inflation remain elevated. The BOJ must decide whether yen weakness requires faster rate increases.
Market scenarios
If the Fed remains hawkish:
- EUR/USD, GBP/USD and AUD/USD may fall.
- USD/JPY may rise.
- Gold and the Stock Indices may weaken.
If the Fed becomes more dovish:
- EUR/USD and GBP/USD may recover.
- Gold and stock indices may rise.
- USD/JPY may fall.
If the BOJ becomes more hawkish:
- USD/JPY and other yen crosses may fall.
- The Nikkei may weaken.
If the BOJ remains cautious:
- USD/JPY may retest recent highs.
- Intervention risk may increase.
5. Jackson Hole
The Jackson Hole symposium from August 27 to 29 may be the biggest scheduled market event of the summer. The Federal Reserve chair’s speech could give traders more information about the September Fed meeting.
Market scenarios
A hawkish speech:
- US bond yields may increase.
- EUR/USD and GBP/USD may fall.
- USD/JPY may rise.
- Gold and the Stock Indices may weaken.
A dovish speech:
- Gold and Stock Indices may rise.
- EUR/USD and GBP/USD may strengthen.
- USD/JPY may move lower.
6. Tariffs and Trade Tensions
Higher tariffs increase the cost of imported goods. Companies may pass these costs on to customers, which can add to inflation. Tariffs may also reduce company profits and slow global trade, especially if other countries respond with their own restrictions.
Market scenarios
If tariffs increase inflation expectations:
- The Fed may keep rates high for longer.
- The US dollar may strengthen.
- Gold and Stock Indices may fall.
If trade tensions become worse:
- Risk sentiment may weaken.
- The dollar may initially benefit from safe-haven demand.
If new trade agreements or exemptions are announced:
- Stock indices may rise.
- Risk-sensitive currencies such as the Australian dollar may strengthen.
- The dollar may weaken as risk appetite improves.
Many Themes, Many Opportunities
With several important themes moving markets this summer, traders may find opportunities in FX, gold, WTI and stock indices. The first step is to understand which theme is driving the market and which assets are reacting most clearly.
Traders do not need to trade every headline. By waiting for a clear move, choosing the markets they understand best and managing risk carefully, they can take advantage of summer volatility without taking unnecessary risks.
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