A Ball of Central Bankers

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The macro point

In the current market conditions, it is hard to see what could allow a lasting rebound of the euro against the US dollar. The pair has lost nearly 7.4% since the beginning of the year. This is certainly just the beginning. It is still too early to know if parity will be reached (it is more of a symbolic level than an important technical threshold). But it is obvious that the downside potential of the single currency is very significant in the short and medium term. On one hand, the US Federal Reserve (Fed) is adopting an aggressive stance in its monetary tightening process (raising the key rate by 75 basis points last week, which is a first in twenty-eight years). It leaves the door open to similar amplitude increases in the very short term (in July). This strengthens the US dollar, unsurprisingly. On the other hand, the European Central Bank (ECB) still has somewhat unsuitable communication. During its June meeting, the central bank disappointed the market by not paying more attention to the risks of financial fragmentation within the eurozone (increased borrowing costs and reduced liquidity in the bond market of Southern eurozone countries). It was forced last Wednesday to organize an emergency meeting to address the issue (a first since March 2020). One might have hoped that the central bank would announce concrete measures. This was not the case. It mainly indicated that a tool to manage borrowing cost gaps between eurozone countries will be unveiled shortly. This is insufficient. As often, the ECB is acting late. This penalizes the euro. Above all, it will cost growth points while all recent indicators confirm that the recovery dynamics are slowing down. There are many worrying signals on both sides of the Atlantic. Last week, US retail sales in May contracted for the first time this year (-0.3% month-on-month). It was inevitable. The sharp rise in inflation will push consumers to limit their spending. It is likely that the dynamics will remain positive for a few more months in the tourism, hospitality, and restaurant sectors (due to the summer season). But the worst is yet to come. The wave of layoffs starting in the United States is also worrying. Within a few days, several major groups announced layoffs (Compass, Coinbase, Redfin Corporation, etc.). The number of employees who lost their jobs is around 100,000 according to our estimates. Unfortunately, this is just the beginning. The deterioration of the job market in the United States is inevitable due to the conjunction of high inflation and the soaring cost of capital (it is becoming increasingly difficult to refinance). We had very few European statistics last week. However, the indicators published over the past few weeks confirm that a similar trend is setting up in Europe as well. At Mondial Change, we believe it is too early to talk about a real risk of recession. It is probably more of a topic for 2023. On the other hand, it is clear that the economic recovery will significantly slow down during the second half of the year almost everywhere. China could be the only exception as more and more support measures are being announced in anticipation of the upcoming autumn Congress, which has the main goal of renewing Chinese President Xi Jinping for another term. The Chinese stimulus will be beneficial for Europe due to trade exchanges (more beneficial for Germany than for France). However, patience will be needed. In economics, it is estimated that the Chinese stimulus takes about six to nine months to have a real impact on statistics. Volatility was significant in currencies last week due to central banks. The EUR/USD fluctuated in a range of about 240 points, the EUR/CHF in a range of 350 points (due to the surprise 50 basis point increase in the key rate by the Swiss National Bank), and the EUR/JPY in a range of 496 points! Even the EUR/GBP experienced a surge towards 0.8720 before returning to its cruising zone around 0.85 at the end of the week. Technical analysis still confirms the downward trend on the EUR/USD. The next level to watch is the support area located at 1.0387 (which would probably be reached during the summer). Given the economic uncertainty, it cannot be ruled out that some central banks may be more interventionist in exchange rates (particularly the Swiss and Japanese central banks). The right risk coverage strategy must be adopted before we enter the holiday period, which is fraught with dangers (notably because traded volumes tend to drop sharply). The supports and resistances displayed below respectively indicate the low and high points within which the rates should move during the week.

	SUPPORTS	HEBDO	RESISTANCES	HEBDO
	S2	S1	R1	R2
EUR/USD	1.0252	1.0387	1.0736	1.0978
EUR/GBP	0.8171	0.8381	0.8672	0.8801
EUR/CHF	0.9911	1.0041	1.0390	1.0601
EUR/CAD	1.3321	1.3475	1.3850	1.4124
EUR/JPY	136.45	139.18	143.28	144.69

This week, macroeconomics should take a back seat in the foreign exchange market. There will be few important statistics (perhaps with the exception of inflation in the UK in May). The major trends of recent weeks in exchange rates are likely to continue, particularly on the EUR/USD. The possibility of a technical rebound is low. Finally, it will be necessary to monitor tensions on European bonds (mainly the borrowing costs of Southern eurozone states). This is an element that undeniably weakens the single currency and will encourage foreign investors to withdraw their capital from the Union. Below you will find the publications and events that are expected to have a major impact on the evolution of currency rates.

DAY	TIME	INDICATOR	WHAT TO EXPECT?
22/06	08:00	Consumer Price Index (May)	First estimate expected at 9.1% against 9.0% in April.
23/06	10:00	Composite PMI (June)	First estimate at 55.3 against 54.8 in May. As a reminder, PMIs have been poor leading indicators of economic growth since the pandemic.
	15:45	Markit Composite PMI (June)	Analysts' consensus predicts an index at 53.5 (still in expansion territory).
24/06	10:00	IFO Business Climate Index (June)	New decline expected to 91.4 against 93.0 in May.
	16:00	Revised University of Michigan Confidence Index	The consensus is optimistic (59.1 against 50.2 in the last estimate).