A New World

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The macro point

The economic indicators published last week in the eurozone refer to a world that no longer exists. The eurozone posted a very respectable growth of 4.6% year-on-year in the fourth quarter of 2021. In Germany, industrial production increased sharply in January by 1.8% year-on-year. Production was up in all sectors, notably in construction, which rebounded by more than 10%. But that was before the war in Ukraine put an end to the positive momentum.

As the European Central Bank (ECB) reminded us last Thursday, the economic landscape is now completely different. Inflation is at the heart of concerns. It could increase considerably in the coming months due to the soaring price of raw materials (energy and agricultural products). This prompted the ECB to adopt a hawkish tone—in favor of a rapid normalization of monetary policy. The end schedule of QE (for Quantitative Easing) has been accelerated to the third quarter of this year, against the fourth quarter initially. The money market adjusted its expectations for an increase in the key interest rate in response. Now, traders expect a first rate hike of 25 basis points next September. As we indicated a few weeks ago, these expectations are very volatile depending on central bankers' speeches and the latest statistics. They are nevertheless important as they have a definite influence on exchange rate developments, particularly EUR/USD in this case. Some analysts believe that the ECB wants to rapidly normalize its monetary policy to support the euro, which has fallen sharply since the outbreak of the war in Ukraine. A weak euro results in increased imported inflation. This thesis is not absurd and may at least partially explain the ECB's positioning last Thursday.

Many other central banks are on the same wavelength. The Polish central bank raised its main interest rate to 3.50% last week—a 75 basis point increase in one go. This is more than the consensus expected. The desire to support the Polish currency, the zloty, which has depreciated sharply over the past two weeks, as well as the need to counteract inflationary pressures, were the two factors cited to justify this abrupt tightening of the money supply. The central bank governor, Adam Glapinski, has clearly indicated that further rate hikes are on the way. Moreover, direct interventions on the currency markets (purchases of zlotys and sales of euros and dollars) will continue. The era of ultra-low rates, which prevailed almost continuously since the financial crisis of 2008, is truly over.
On the currency market, volatility slightly decreased at the end of last week. Many pairs are attempting stabilization, similar to EUR/USD. The main Forex pair could continue its consolidation in the very short term. In the coming weeks, however, we see maintenance of volatility within a fairly wide range between 1.0805 and 1.1190. The risks of falling below 1.0805 are high in the event of increased geopolitical risk (related to Ukraine). In the longer term, it must be acknowledged that we lack visibility. Commerzbank indicated in a note published last week it expects EUR/USD to end the year around 1.16. Making exchange rate forecasts at such a distant horizon often proves risky. We prefer to abstain.

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

	SUPPORTS	WEEKLY	RESISTANCES	WEEKLY
	S2	S1	R1	R2
EUR/USD	1.0658	1.0805	1.1190	1.1289
EUR/GBP	0.8112	0.8255	0.8579	0.8812
EUR/CHF	0.983	1.0036	1.0403	1.0499
EUR/CAD	1.3538	1.3787	1.4302	1.4479
EUR/JPY	122.48	125.5	130.03	131.69

The situation in Ukraine will remain a major focus this week as any potential military deterioration or new Western sanctions against Russia can cause significant volatility on the currency markets. The meeting of the United States Federal Reserve (Fed) will be the other potential factor for volatility. However, the issue is low. Less than ten days ago, Fed Chairman J. Powell indicated that a 25 basis point increase in the key interest rate is almost assured. Meanwhile, the consumer price index in the United States has reached a high since 1982, at 7.9% year-on-year. There is no doubt that the Fed must act. However, there is high uncertainty regarding the pace of appreciation of rates thereafter. It is not certain that J. Powell will be very clear on this point. The war in Ukraine raises many unknowns. Central banks must, as much as possible, maintain a certain flexibility to best adjust monetary policy.

Below you will find the publications and events that should have a major impact on the evolution of currency prices.

DAY	TIME	INDICATOR	WHAT TO EXPECT?
15/03	11:00	ZEW Economic Sentiment Index (March)	Increase to 55.0 from 54.3 previously.
16/03	19:00	FOMC Statement	Update of economic projections and likely 25 basis point rate hike.
	19:30	J. Powell Press Conference	J. Powell will face a difficult task: convincing the market of his intention to combat high inflation in an uncertain macroeconomic context due to the war
17/03	13:00	Central bank meeting	Monetary policy status quo.
	13:30	Philadelphia Fed Manufacturing Index (March)	Consensus at 18.0 from 16.0 previously.