A New Approach

The information presented in this publication is provided solely for informational purposes and does not constitute investment advice, nor an offer to sell, nor a solicitation to buy, and should in no case serve as a basis or be considered as an encouragement to engage in any investment.

The macro point

The European Central Bank (ECB) stood firm by raising its main policy rate by 50 basis points last Thursday. Now it's the turn of the U.S. Federal Reserve (Fed). The market is split between a rise of 25 or 50 basis points. This is a high-risk potential event for the currency market this week. "It is impossible to determine the trend of rate hikes." This statement alone summarizes last Thursday's press conference by the President of the European Central Bank (ECB), Christine Lagarde. For over fifteen years, central banks have accustomed us to a fine-tuned management of monetary policy based on precise channeling of market operators' expectations (forward guidance). That’s over now. We will have to navigate by sight. The reason? The economic and financial horizon has become considerably more complex in the space of a few weeks. Economic growth shows signs of slowing, inflation is not dropping fast enough (in February it was at 8.5% year-on-year in the eurozone), and add to this the troubles of the banking sector (failure of three American banks positioned in market niches and renewed concerns about the health of Credit Suisse). Objectively, given the unusually complicated context, any forecast made today is likely to be invalidated tomorrow. That is why, after raising its deposit rate by 50 basis points, as expected, the ECB refrained from making a commitment on the magnitude of the upcoming rate hikes. Instead of forward guidance, it seems to adopt a dual approach based both on the necessity of achieving the price stability target of 2% (we are far from it) and a financial stability objective. It also reaffirmed having the necessary tools if it needed to supply the financial sector with liquidity to cope with rising interest rates. This is not an immediate issue, but it has helped to ease the concerns of some market operators. One of the tools it could deploy are the TLTROs – long-term refinancing operations with banks (which we have already mentioned here). The current program expires next June. It could be extended. This would allow banks to refinance at low cost under good conditions. To say the least, the exercise faced by C. Lagarde was not easy. She handled it rather well. It helped stabilize the EUR/USD, which experienced very high volatility last week (fluctuation range of more than 200 points). Across the Atlantic, inflation was also on the agenda. The Consumer Price Index (CPI) for February was published. Let's say it was mixed. The CPI fell by 0.4 points to 6% year-on-year. This is the lowest level since September 2021. However, core inflation (which excludes the most volatile elements) is not really retreating (a drop of only 0.1 point to 5.5% year-on-year). It is precisely core inflation that is closely watched by central bankers as it is more representative of reality and the persistence of inflationary pressures. In detail, the services and real estate sectors contribute the most to rising inflation. In one month, rent increased by 0.8%, hotel rooms by 2.6%, and airline tickets by 6.4%. All this confirms that the decline in inflation is not going to be a smooth journey, there will be bumps, and patience will be required. Needless to say, monetary policy will likely need to be tightened further in the future. We will return to this in a moment. As for employment, there is no notable change. The dynamic remains favorable. Weekly jobless claims, which were published last Thursday, came out lower than expected at 192,000 against a consensus forecast of 205,000. A quick note about Asia. New machinery orders rebounded strongly in January in Japan (+4.5% year-on-year and +9.5% month-on-month). This is quite unexpected. This indicator is important (it is often used by economists) because it serves as a barometer for international trade. The January data contradict other statistics on international trade (which tend to show a slowdown). It will likely take a few more months to get a clearer picture.

Technical point

The word of the week was volatility in the foreign exchange market (linked to banking sector troubles). Just to give you some examples: EUR/USD moved in a range of more than 200 points, EUR/CAD in a range of 220 points, and EUR/CHF in a range of 160 points. This is obviously unusual. The euro mainly lost ground against the Japanese yen, which regained its status as a preferred safe haven in times of uncertainty (EUR/JPY pair decreased by 1.26% in a week). However, after significant losses, the euro regained ground against the US dollar and the Swiss franc. But last week's end rebound is fragile. There is still a lot of uncertainty surrounding the situation on the banking front and the possible reaction of market participants. Nonetheless, we tend in the very short term to increase our exposure to safe haven currencies (especially to JPY, which should be the big winner if a détente does not occur quickly). The supports and resistances shown below indicate the low and high points within which rates should evolve during the week.

	Weekly Supports		Weekly Resistances
	S2	S1	R1	R2
EUR/USD	1.0391	1.0511	1.0755	1.0840
EUR/GBP	0.8635	0.8698	0.8925	0.9007
EUR/CHF	0.9640	0.9744	0.9987	1.0162
EUR/CAD	1.4070	1.4343	1.4879	1.5150
EUR/JPY	135.50	138.44	141.70	144.35

Announcements to follow

It's a very busy week starting with no less than three central bank meetings. In the United States, the market is divided on the size of the rate increase to be announced this Wednesday. Inflationary pressures remain high. This argues for a 50 basis point increase. At the same time, the difficulties of part of the banking sector invite caution and a smaller increase (25 basis points). In any case, the decision by the American Federal Reserve (Fed) will certainly be criticized by market participants. Expect a resurgence of volatility in USD pairs, particularly EUR/USD, on Wednesday evening. Think about adopting the right hedging strategy if you are exposed. On the side of the Swiss National Bank, there is little doubt that a 50 basis point rate increase will be announced, which should support the Swiss franc. Finally, uncertainty is also present regarding the decision the Bank of England could make this Thursday. The majority of market participants anticipate a 25 basis point increase, but a minority are instead predicting a pause in monetary policy. It is certainly premature, in our opinion. This week is going to be hectic. That's for sure. We take this opportunity to announce an expansion of our currency capabilities. Eighteen new currencies of Africa, South America, and Asia are now tradable for buying AND selling with very favorable exchange rates. If you have payment needs and/or revenue repatriation in these currencies, contact our trading desk. We will be sure to share the news about these currencies in our weekly bulletin, when relevant. Below you will find publications and events that should have a major impact on the development of currency rates.

Day	Time	Country	Indicator	What to Expect?
21/03/2023	11:00	EUR	ZEW Economic Sentiment Index in Germany (March)	Decline to 22.0 from 28.1 in February.
22/03/2023	08:00	UK	Consumer Price Index (February)	Consensus at 10.3% against 10.1% in January
22/03/2023	19:00	USA	Central Bank Meeting	The market is divided between a 25 basis point increase or a 50 basis point increase.
23/03/2023	09:30	CH	Central Bank Meeting	Expected 50 basis point increase in the main interest rate.
23/03/2023	13:00	UK	Central Bank Meeting	Expected 25 basis point rate increase.