A Little Breeze of Panic

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The macro point

The meeting of the U.S. Federal Reserve (Fed) caused significant turmoil in financial markets last week. Volatility returned across all asset classes, including currencies. The Fed's statement was in line with expectations: maintaining the key interest rate between 0% and 0.25% for now, ending tapering (reduction of asset purchases) next March, and a flexible monetary policy depending on the evolution of growth and inflation. However, the press conference by the Fed chairman, Jerome Powell, puzzled many traders. He adopted a clearly 'hawkish' tone (in favor of monetary tightening), not ruling out accelerating the pace of rate hikes this year and the start of balance sheet reduction, potentially as early as next June. The consequence was immediate on the money market. Before the Fed meeting, the analyst consensus anticipated four key rate hikes this year. Now, five rate hikes are anticipated. Some major market players go even further: the American bank Nomura forecasts a key rate increase of 50 basis points next March (versus 25 basis points for the consensus) and the French bank BNP Paribas now anticipates six rate hikes in 2022. This is certainly exaggerated.

Powell's 'hawkish' tone destabilized the forex market, which will result, at a minimum, in maintaining volatility in the coming weeks, especially for USD pairs. It also had a direct effect on monetary tightening expectations in the eurozone. The market now anticipates a first rate hike by the European Central Bank (ECB) in December 2022 versus early 2023 just a few days ago. Officially, the ECB is still planning on a first hike only starting next year.

It is important to understand that these expectations are very fluctuating. They evolve based on the statements made by central bankers and macroeconomic indicators (unemployment, inflation, consumption dynamism, etc.). But they have an immediate impact on the fluctuations of many assets, and especially on the exchange rate of major currencies. That is why it is important to monitor them closely, particularly when there are significant adjustments like those that occurred last week.

In Canada, the central bank (BoC) surprised traders by maintaining its monetary policy unchanged despite the rebound in inflation, which is at a thirty-year high. It cited uncertainties related to the Omicron variant to justify the status quo. Many traders anticipated a rate hike as early as this month. It will probably be necessary to wait until next March at the earliest.

In emerging countries, the process of rate hikes also continues. The central bank of Chile drastically tightened its monetary policy by raising the main rate from 4% to 5.5% in one go. Like almost everywhere on the planet, inflation is also a problem for the country. The consumer price index is dangerously approaching 7% - well beyond its target of 3%. Further rate hikes are expected both in emerging markets and in developed countries to try to contain persistent inflationary pressures. The era of easy money (which was linked to the maintenance of ultra-low rates) is definitely over. We have entered a phase of rapid normalization of monetary policy that was still unimaginable a year ago.

On the forex market, the EUR/USD fell sharply following the Fed meeting. It was predictable. The pair shows a decline of nearly 1.85% over the last five sessions. Everything suggests that the decrease should continue. The next technical levels to watch are support areas at 1.1057 and 1.0967. Traders are largely positioned for selling but without excess. A short-term technical rebound seems unlikely at the moment. Note the great stability of the EUR/CHF pair, which continues to evolve between the bounds of 1.03 and 1.04. It is likely that the Swiss National Bank is intervening in the forex market to limit the appreciation of the Swiss franc.

The supports and resistances shown below respectively indicate the lows and highs within which the rates should evolve during the week.

	SUPPORTS	HEBDO	RESISTANCES	HEBDO
	S2	S1	R1	R2
EUR/USD	1.0967	1.1057	1.1419	1.1501
EUR/GBP	0.8130	0.8241	0.8463	0.8574
EUR/CHF	1.0157	1.0256	1.045	1.0565
EUR/CAD	1.3985	1.4105	1.4363	1.4495
EUR/JPY	126.74	127.74	129.23	129.73

The central banks will again be the main drivers of fluctuations in the forex market this week. The ECB meeting should not hold any surprises. For now, monetary policy in the eurozone is on autopilot. It will be during the next March meeting that we might have more indications on the short-term evolution in the wake of the macroeconomic projections update.

Finally, the money market anticipates a key rate hike by the Bank of England (BoE) this Thursday. The rate could be raised to 0.50% against 0.25% currently. Caution is needed. The consensus was recently wrong regarding the BoC decision. This could be again the case with the BoE. If you are exposed to the British pound, consider adopting the right forex hedging strategy ahead of Thursday's meeting.

Below you will find the publications and events that are expected to have a major impact on currency rates.

DAY	TIME	INDICATOR	WHAT TO EXPECT?
31/01	08:00	GDP (Q4)	The consensus expects a contraction of -0.2% against a growth of 1.7% in the third quarter.
01/02	16:00	ISM Manufacturing PMI (January)	Expected at 58.3 against 58.8 previously.
02/02	11:00	Consumer Price Index (January)	Inflation expected to come out at 5% year-on-year.
	14:15	ADP Nonfarm Employment Change (January)	Strong decrease expected at 250k against 807k in December.
03/02	13:00	Central Bank Meeting	It is almost certain that the Bank of England will increase its key rate by 25 basis points to 0.50%.
	13:45	Central Bank Meeting	No monetary policy change is expected.
	16:00	ISM Non-Manufacturing PMI (January)	The analyst consensus expects a decline to 61.8 against 62.3 in December.
04/02	14:30	Employment Report (January)	Unemployment rate expected stable at 3.9% and job creation expected to rise to 238k (against 199k in December).