The factors pushing volatility lower through the first half of the year are beginning to lose traction, and the list of outcomes that could topple prevailing market assumptions is multiplying: Long-term interest rates could yet revert higher if inflation rates remain elevated. A policy mistake could trigger a financial crisis or drive economies into recession more quickly than currently expected. A ceasefire in Ukraine could drive a reappraisal in global energy markets and lift the euro out of its malaise. An aggressive stimulus push from Chinese authorities might send commodity prices soaring. The artificial intelligence mania could reach new heights – or implode.

The current lack of clear directional narratives is also vulnerable to change. We think the monolithic “higher for longer” message from central banks will become more nuanced and variegated as time progresses. In the US, expectations for rate hikes are now relatively well aligned with projections from policymakers themselves – most importantly, the Fed’s dot plot – but these could shift as signs of softness emerge in the economy. The European Central Bank might change its views even more quickly as growth flatlines and inflation subsides. And doves at the Bank of England could reassert themselves if labour markets begin deteriorating – with the Australian and Canadian central banks following suit at a lag.

Ultimately, we suspect traders will soon become more willing to build high-conviction positions in individual currencies – which should lead to an increase in speculative flows.

Net Long (+) or Short (-) US Dollar Futures Position Held by Large Speculators, Billions USD