A Brief Moment of Respite

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The macro point

We warned you, last week was rather quiet on the statistics front. There was hardly anything to get into. German inflation was the main point of attention for traders. It saw a slight increase in January to 8.7% year-on-year. This is not surprising. Several European countries (France, Belgium, for example) experienced a similar increase over the period. However, the downward trend persists and we are far from the peak reached last October (10.4% year-on-year). The decrease in energy prices is the main element explaining the decline observed in recent months. Gas prices are collapsing. This is good news. The European benchmark is around the 53 euro area – its lowest level since September 2021. However, this corresponds to a price 25 euros higher than its five-year average. As winter is much milder than expected (thanks to climate change, unfortunately!), stocks are at high levels which reduces pressure on prices. At the European Union level, the stock fill rate reaches 69%. According to experts, by early March, we should be around 60%. It's high. It's even an unprecedented level. For comparison, the fill rate in March 2020 (at the time of global lockdown and in full recession, therefore with naturally lower demand) was 54%. We believe there will certainly be points of tension concerning gas prices next winter (since we will no longer have Russian supply). But it will be incomparable to what we experienced last September. The worst is behind us. However, not all risk factors have disappeared. If we look in detail at the evolution of inflation in most European countries (including France), we see that food seems to be taking over from energy. Inflationary pressures will certainly not disappear overnight. This will obviously be difficult for the least well-off households who are much more receptive to a significant increase in food prices. In the short term, the figures communicated in the last fifteen days concerning inflation should have no real impact on monetary policy in the euro zone in the short term. It is evident that another 50 basis point rate hike is scheduled for March. In the absence of a recession, the European Central Bank (ECB) has almost all the leeway it wants to increase the cost of money. We are counting on a monetary policy pause only around the summer of 2023 (which is in line with market consensus). There was also some news at the central banks level (not on the side of the major economies, however). The Polish central bank kept its main policy rate unchanged for the fifth consecutive month, at 6.75%. Although consumer prices are very high, they have fallen in recent months (to 16.6% year-on-year in December 2022 – compared to about 6% in France!). The central bank fears that by raising rates too much, it will lead to a serious economic slowdown and a deterioration in the labor market. This issue is shared by many central banks in the region. This is especially the case for the Hungarian central bank. For several months, it has kept its rates unchanged. The only (notable) difference is that Hungary is certainly already in a technical recession since the third quarter of 2022. This will not be the case for Poland, whose economy is much more resilient (we also start from a higher potential GDP level). Since the beginning of the year, almost all Central and Eastern European currencies have made an impressive catch-up against the euro (this is the case of the Hungarian forint) which is linked to the return of risk appetite. But if the situation on the macroeconomic front quickly deteriorates in some countries, there may be a reversal of trend. We particularly doubt that the rise of the forint is sustainable in the medium term. If you are exposed to this geographical area, this is certainly the right time to review your exchange rate hedging strategy. In the forex market, we expect the downward trend on EUR/USD to persist in the short term (as we indicated last week). The pair remains slightly positive territory since the beginning of the year (+0.16%). The phenomenon is not limited to the dollar as there are profit-taking on the single currency against its main counterparts. It's logical. When there are extreme buying positions on a currency, at a certain stage, there is a rebalancing. That's exactly the situation we are facing. In the medium term, we do not think that the underlying upward trend is currently in question. Note also that a new governor of the Bank of Japan has just been appointed (he will take office next April). The yen strengthened following last Friday. But the long-term impact on Japanese monetary policy (which is still very accommodative) is uncertain at this stage.

The supports and resistances displayed below indicate, respectively, the low and high points within which the courses should evolve during the week.

	Weekly Supports		Weekly Resistances
	S2	S1	R1	R2
EUR/USD	1.0601	1.0660	1.0793	1.0860
EUR/GBP	0.8636	0.8761	0.9012	0.9135
EUR/CHF	0.9626	0.9770	0.9968	1.0063
EUR/CAD	1.4168	1.4292	1.4690	1.4890
EUR/JPY	136.35	138.88	143.92	146.95

We doubt that the week starting will be much more exciting on the economic front than the previous one. The consumer price index (CPI) in the United States is always a major point of attention, obviously. The CPI is expected to decrease to 6.2% year-on-year. This would confirm that the peak of inflation is indeed behind us (but tensions remain such as the price-wage loop which is still problematic). This statistic should not, however, influence in any way the monetary policy of the American Federal Reserve (Fed). Its president, J. Powell, was rather clear during his press conference. In the short term, another 25 basis point rate hike is planned. On both sides of the Atlantic, monetary policy is rather on autopilot for now. This reduces the risk of strong volatility on the major Forex pairs.

Below you will find the publications and events that should have a major impact on the evolution of currency rates.

Day	Time	Country	Indicator	What to expect?
02/14/2023	14:30	USA	First estimate of the consumer price index (January)	Consensus at 6.2% year-on-year compared to 6.5% in December.
02/16/2023	14:30	USA	Philadelphia Fed Manufacturing Index (February)	Previous at -8.9.
02/16/2023	14:30	USA	Producer price index (January)	Consensus at 0.4% month-on-month.