A Milestone is Reached

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The macro point

It's confirmed, the major Western central banks are pivoting and will start a cycle of lowering key interest rates next year to support the economy. For now, risk assets, particularly the euro, are the main beneficiaries. But we believe this will not last. The market is too negative on the US dollar. The fundamentals of the American economy are very good. We expect economic growth to be stronger on the other side of the Atlantic than in the eurozone, which will eventually support the dollar. It's done. The markets have been waiting for several months. Finally! The central banks are making their monetary policy pivot. The year 2023 was marked by an unprecedented tightening of monetary conditions – a 520 basis point increase in key interest rates globally. The coming year will be one of rate cuts. The exact schedule is not yet defined. A minority of analysts believe the easing cycle will begin at the end of the first quarter of 2024. Most are betting on the second quarter. At this stage, it doesn't change much. Expectations of rate cuts will, in any case, continue to fluctuate in the coming weeks based on the evolution of statistics and the speeches of central bankers. What is remarkable in the process that is beginning, is that for the first time, the expected rate cuts are not the consequence of a recession but rather the desire to prolong the economic expansion cycle. The economy is weakening. In France, growth is expected to barely reach 0.8% next year. In the United States, it will surely be better, between 1.2-1.5% depending on the polling institutes. The central banks' goal is therefore to give a boost to the economies, by allowing a revival of credit and consumption. There are of course exceptions. In Norway, no pivot is in sight. Last Thursday, Norges Bank decided to increase its key interest rate while all other central banks are maintaining or lowering rates. The cost of money is now 4.5% and it should remain at this level for a long time according to the central bank, which remains concerned about inflationary pressures. There is also the case of the Bank of Japan. It has been exactly a year since investors have regularly discussed a possible exit from negative rates. A few weeks ago, the consensus thought that this month would be the right time to raise rates. Suddenly, the central bank was clear: it does not consider an exit from negative rates appropriate at this time. The meeting on December 18 and 19 should therefore be a non-event. It is not in December that the Japanese yen will sustainably rebound. There remains a great uncertainty for next year, which is China. Will 2024 be the year of the great rebound of the Chinese economy? Not necessarily. Last week, the Central Economic Work Conference took place. It is a strategic conference to set the economic priorities of the Chinese government. It resulted in several key decisions:

The government wishes to undertake a vast tax reform but it is aware that this will take a lot of time.
In the short term, it wishes to implement in 2024 a targeted tax reduction that will mainly affect the high-tech and manufacturing sectors. In other words, these are the two segments that Beijing wishes to support the most.
No increase in spending is planned. The central government, the provinces, the party, and government agencies will have to tighten their belts in a context where the level of debt remains a major concern.
New support measures for the real estate sector are inevitable, even if no specific measures have been unveiled at this time.
This seems to indicate that the Chinese recovery will still be sluggish in 2024, with growth between 4-5%. It's good. But it's certainly an insufficient growth rate for China given its economic development. In no way will China be a driver of global growth next year, in our view. Any excess optimism regarding the Chinese economy, as was the case at the beginning of 2023, risks leading to disappointment.

Technical point

In the foreign exchange market, the approach of a rate-cutting cycle in a context of sluggish growth rather than recession tends to be negative for the dollar and positive for risky assets, like the euro. That's the theory. But we continue to doubt that the euro can outperform the dollar over time when the European economy shows a much lower growth rate than the American economy. It has never happened in the past and we don't see what element could make this time different. Moreover, the euro's rise against the dollar remains measured (+1.8% over the last five sessions). We continue to believe that a rebalancing will inevitably occur on the EUR/USD pair, either before the holidays or after, with a target exchange rate rather around 1.06-1.07. The supports and resistances displayed below indicate the respective lows and highs within which the rates should evolve during the week.

	Weekly Supports		Weekly Resistances
	S2	S1	R1	R2
EUR/USD	1.0650	1.0723	1.1150	1.1199
EUR/GBP	0.8412	0.8445	0.8702	0.8799
EUR/CHF	0.9311	0.9392	0.9642	0.9699
EUR/CAD	1.4501	1.4602	1.4899	1.5002
EUR/JPY	153.50	154.01	157.01	158.55

Announcements to follow

From a statistical point of view, this is the last important week of the year before the Christmas break. Inflation figures in the eurozone and the UK will be closely watched even if they will not challenge recent monetary policy decisions and the prospect of rate cuts. The Bank of Japan is the last major central bank to meet on December 18 and 19. Let's be direct, there is nothing to expect. In a communication about ten days ago, the Bank stated that it does not consider an exit from negative rates to be opportune in December when the foreign exchange market was buzzing with rumors to that effect. It is becoming increasingly difficult to know in which direction Japanese monetary policy will lean. One thing is certain, the window of opportunity to normalize rates is closing rapidly. It will be difficult to do so when other central banks are lowering them. To be continued. Below you will find the publications and events that should have a major impact on currency exchange rate developments.

Day	Time	Country	Indicator	What to expect?
12/18/2023	10:00	DE	IFO Business Climate Index (December)	Previous at 3.2% year-on-year.
12/19/2023	11:00	EUR	Consumer Price Index (November)	Previous at -0.5% month-on-month.
12/20/2023	08:00	UK	Consumer Price Index (November)	Previous at 4.6% year-on-year.