A Little Break The information presented in this publication is provided purely for informational purposes and does not constitute investment advice, a sales offer, or a solicitation to purchase, and should in no way serve as a basis or be taken as an incentive to engage in any investment. The macro point It's done. The American Federal Reserve is on pause until further notice. It is not officially the end of the rate hike process. But it certainly looks like it. From now on, it is no longer the rate differential that is likely to influence the trajectory of currencies as much as the growth differential. It clearly favors the American dollar. Beware of the geopolitics in the background. This can change quickly! Given the current nervousness of financial markets, this is not the right time to catch investors by surprise. The American Federal Reserve (Fed) understands this well. As expected, it kept its key rate unchanged at a twenty-two-year high. The main rate remains within the range between 5.25 and 5.5%. However, this is not the end of the monetary tightening process. The central bank reserves the right to intervene again depending on the evolution of financial conditions. It has two main tools to tighten them: interest rates (which opens the door to a new rate hike in December or January, if necessary) and the balance sheet. From our perspective, the Fed will no longer move interest rates. However, it should continue the process of shrinking its balance sheet (quantitative tightening) which is just as effective as rates in achieving restrictive financial conditions. To give you an example, according to a Goldman Sachs study, the balance sheet reduction between late September and late October represented the equivalent of a rate hike of 80 basis points. It is therefore likely that the Fed will continue to use this lever if it deems it necessary to maintain restrictive monetary policy. For financial markets, the reduction of the balance sheet translates into a decrease in liquidity. This is bad news for all risky assets. It can also trigger or contribute to the emergence of market accidents (e.g., sudden drop in liquidity on certain assets causing significant price fluctuations). Such accidents are more frequent in equities but there have been a few in currencies in the past. Caution is advised. On the macroeconomic front, we have good news to share with you. The disinflation process continues in the eurozone, including in France. If we are a bit lucky, it is likely that the government’s 1% growth target for this year will be achieved. It just requires fourth-quarter growth to be 0.4% - it is attainable. Of course, this is not a reason to rejoice. But we are still doing better than our German neighbor who is in recession. Finally, the geopolitical situation continues to deteriorate rapidly. For now, it does not influence financial markets. The yen, which usually benefits from a resurgence of geopolitical risk, is still following a downward trend. However, things can quickly escalate. Last week, Yemen, which is partially under Iran's control, officially declared war on Israel. Several missiles have been launched from Iran towards Israeli territory. The longer the ground operation in Gaza lasts, the more likely it is that Iran will decide to advance its moves in the region (Yemen but also Hezbollah in Lebanon). Finally, in the worst-case scenario, Iran could always decide to block the Strait of Hormuz where about 25% of the global oil consumption transits. Not a single corner of the planet would be spared by the oil blockade. The global economy would plunge into a new paradigm: soaring oil prices, return of inflation, and likely global recession. Such a scenario has, a priori, little chance of occurring. But it cannot be completely excluded. After all, no one a few years ago would have believed that a global lockdown was possible or that Russia could invade Ukraine. Unfortunately, we can never exclude the worst-case scenarios. It's a very dark period. As Voegelin wrote in 1938 about the rise of Nazism, "one must admit that Evil exists as a true substance and an effective force." The geopolitical outlook is not encouraging. Technical point For now, geopolitics is not the main marker of the foreign exchange market. Things can change, obviously. However, it's growth differentials that seem to explain most currency exchange rate movements. The strength of the U.S. economy continues to attract foreign capital, supporting the U.S. dollar. Conversely, European macroeconomic woes (very weak activity in the Eurozone) continue to weaken the euro. The EUR/USD pair is likely to reach a low point around 1.0350-1.0400 in the coming weeks and months. The euro follows a mostly downward trajectory against almost all its major counterparts. But there's an exception. It's against the Japanese yen. Last week, the Bank of Japan (BoJ) seemed willing to abandon its policy of controlling the yield curve (a mechanism aimed at avoiding a surge in rates on the bond market). It's a timid first step towards normalizing Japanese monetary policy. However, the market was not convinced as the euro soared against the yen, exceeding the 160 yen per euro threshold (a level not seen since 2008). As long as Japanese monetary policy does not align more closely with other developed countries, yen weakness will persist. FX analysts believe a first BoJ rate hike could occur, at best, next December. This should be kept in mind if you have exposure to JPY. The supports and resistances displayed below indicate the low and high points within which the rates should evolve during the week. Announcements to follow This week will be very quiet in the foreign exchange market. So to speak, there's no important statistic. The consumer price index in Germany and the UK GDP estimate for Q3 are not likely to cause much volatility. Therefore, it's likely that the underlying trends in the foreign exchange market will remain as is. Watch out for geopolitics. It's now the main point of uncertainty for currencies in the short term since monetary policy in major economic zones is on hold. Below you will find publications and events expected to have a major impact on currency course developments.DayTimeCountryIndicatorWhat to expect?08/11/202308:00ALLConsumer Price Index (October)Previous at 0.3% month-on-month change.10/11/202308:00UKGDP (Q3)Previous at 0.6% year-on-year change.