A Mainly Technical Market

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The macro point

There was no usual economic news last week to move the currencies. It was therefore technical analysis that was the main driving force on Forex. This could still be partly the case this week. The observed decline in EUR/USD mainly reflects technical factors. From our perspective, economic fundamentals argue rather in favor of a long-term appreciation of the single currency. If we had to summarize the recent sessions, we were facing a technical market. Macroeconomic indicators were in the background. Central banks did not deliver any particular surprises. It was the technical levels (supports, resistances in particular) that had a notable influence on the trajectory of currencies. There were indeed some news on the economic front. But nothing new. On both sides of the Atlantic, economic surprises are deteriorating. This reflects a consensus that is too optimistic. At the end of 2022, analysts were unanimously too pessimistic (recession in the eurozone and the United States, severe European energy crisis, etc.). Now, the opposite trend prevails. They are too optimistic. As a result, the announced economic figures are below expectations. However, it is too early for this to cause a change in stance from central banks. The American Federal Reserve (Fed) will continue the pause at least during the summer or even beyond. On the side of the European Central Bank (ECB), monetary tightening remains the norm. There is no doubt that a new rate hike of 25 basis points will be announced in June. However, analysts are divided on the future. According to a Reuters poll conducted among 62 economic and financial experts and published last week, 42 predict a new rate hike in July (25 basis points). For the majority, that will be when the terminal rate is reached. Five analysts are out of consensus and also expect an increase in September. On the other hand, they all unanimously agree that the 2% inflation target will not be reached this year (obviously) and not next year either. In the best case, it will be in 2025. This means that we will still have to live in an environment marked by painfully high inflation for a long time. A positive note on the eurozone: the terms of trade continue to improve, with a return to a budget surplus in March after seventeen months of deficit linked to the energy shock. This is good news on the macroeconomic level. But it is also good news for the euro since it is a structural support factor for the exchange rate.

Outside the eurozone, it was China that worried last week. The USD/CNH pair, closely monitored as a barometer of the state of the Chinese economy, crossed the symbolic threshold of 7 for the first time this year. Investors and economic players are increasingly skeptical about the vitality of the Chinese economic recovery. At the beginning of the year, investors were all betting on a significant recovery driven by consumption. For the moment, this has been slow to materialize. Demand is not taking off (hence the sharp contraction in Chinese imports in April). But in addition, the real estate sector shows alarming signs of slowing down (decline in investments). This is a major black mark since China's engine remains real estate (despite the setbacks of many sector players like Evergrande). The forex market expects that the phase of CNH depreciation is just beginning. This helps support exports in addition to the support measures implemented by local governments on the orders of the central government. It is also likely that the Chinese central bank will soon announce liquidity injections to facilitate credit (this could involve a reduction in the banks' reserve requirement ratio - a monetary tool used extensively in China but abandoned in developed countries). In any case, it is clear that the slow pace of the Chinese recovery constitutes a serious macroeconomic uncertainty for the second half of the year.

In addition to the weak growth dynamics in many areas, what concerns us most at Mondial Change is the fear that inflation will restart once the central banks have paused their monetary policy. This is what we are seeing in Canada. The country's central bank hit the pause button considering that inflationary pressures were really subsiding. Unfortunately, the latest statistics show a new increase in inflation. This is a subject to watch closely in the coming months.

Technical point

On the foreign exchange market, the decline of the euro against the U.S. dollar was the major event last week. The euro broke the support zone at 1.0788 (the low point of last April 3rd) during Thursday's session. The downward movement remains short-term if we judge by technical analysis. The main support level to consider is at 1.0670. This decline of the single currency mainly reflects an unexpected appreciation of the U.S. dollar. At this stage, it does not reflect any particular mistrust of the single currency. In the long term, the trend remains bullish on the EUR/USD as long as there is no break of the support zone at 1.0460 (a very distant target, understandably).

The supports and resistances displayed below indicate the respective low and high points within which the rates should evolve during the week.

	Weekly supports		Weekly resistances
	S2	S1	R1	R2
EUR/USD	1.0634	1.0670	1.9089	1.1020
EUR/GBP	0.8509	0.8540	0.8757	0.8990
EUR/CHF	0.9540	0.9650	0.9889	0.9900
EUR/CAD	1.4399	1.4420	1.4654	1.4890
EUR/JPY	145.30	147.40	150.45	152.50

Announcements to follow

There are no major statistics scheduled on the agenda this week. The only nearby central bank meeting is in Hungary. It won't be a market mover, obviously. In the euro area, the IFO business climate index might move the EUR/USD a few pips. But this never changes the short and medium-term trajectory of the pair. The core PCE index in the United States at the end of the week will be watched by economists (as it is an indicator that allows the perception of structural inflationary pressures). But it's not a market mover either. In other words, we are likely facing a mainly technical market again this week.

Below are the publications and events expected to have a major impact on currency rate developments.

Day	Time	Country	Indicator	What to expect?
23/05/2023	09:30	GER	Manufacturing PMI (May)	Consensus at 45.7 against 44.5 previously.
24/05/2023	10:00	GER	IFO business climate index (May)	Consensus at 94 against 93.6 previously.
25/05/2023	08:00	GER	German GDP Q1	Contraction at -0.2%.
26/05/2023	14:30	USA	Core PCE index (April)	Consensus at 0.3%. It's an important statistic as it's closely watched by the U.S. central bank.