A Problem of Expectations The information presented in this publication is communicated to you for informational purposes only and does not constitute investment advice, a sales offer, or a solicitation to buy, and should not, in any case, serve as a basis or be considered as an incentive to engage in any investment. The macro point The market consensus anticipates an imminent and significant rate-cutting cycle in developed countries this year. This is far from certain. Central bankers and statistics do not corroborate this scenario. As was the case in 2023, it is likely that market expectations regarding monetary policy are significantly mistaken. Adjusting expectations will not be easy. For the foreign exchange market, this could translate into a resurgence of volatility. At the end of 2023, the market consensus expected aggressive rate cuts by central banks in developed countries, with the European Central Bank (ECB) initiating the reduction cycle as early as March 2024. This has proved more complicated than anticipated. The statistics published between mid-December and today paint a mixed economic picture. Inflation continues to decline rapidly in the eurozone, but the recession is no longer as certain as before. The strong surge in credit to households and businesses in the latest quarterly ECB survey does not support this scenario. Furthermore, several significant voices within the ECB Governing Council have hinted that a hasty rate cut is not on the agenda. The ECB would like to ensure that there is no wage-price spiral in the eurozone that would take over from the price-profit spiral that affected 2022 and part of 2023. The market may therefore be wrong in thinking that the ECB will act first. The same uncertainties are found on the United States side. There are very poor indicators, particularly concerning dynamics in the manufacturing sector. It will be interesting to monitor the Philadelphia Fed’s manufacturing index to be published on January 18. But on the other hand, there are also very solid indicators, notably in the labor market. The United States created 216,000 jobs in December. Even if previous months were revised downwards, employment growth still averages 165,000 over three months, which is quite respectable. Additionally, the average wage growth increased from 4.0% in November to 4.1% in December. All this does not support a forthcoming and significant rate cut as anticipated by the analysts’ consensus. The same problem of mismatch between market expectations and reality arose in 2023. At that time, it was not about cutting rates but raising them to combat inflationary pressures. The consensus had anticipated a 141 basis point rate increase by the ECB. It was ultimately 250 basis points. The same for the US Federal Reserve (Fed): a predicted increase of 66 basis points which in reality turned into a 150 basis point increase. In both cases, there is a substantial 100 basis point differential. The market often tends to be too extreme in its monetary policy expectations. In the previous case, we think it is wrong to anticipate significant rate cuts. Our main argument: the economy is not sufficiently underperforming to warrant such action. As for the ECB, we believe that two to three rate cuts of around 25 basis points each constitutes a coherent economic scenario in light of the latest statistics. The consensus expects more than 140 to 150 basis points of cuts. As was the case last year, the gap between expectations and reality will need to close, which will likely lead to a lot of volatility for currencies, particularly the euro and the dollar. Adding to this the current eventful geopolitical cycle, we tend to believe at Mondial Change that 2024 will be the year of the return of volatility. For now, it is contained. That is normal at this time of year. But it could reappear faster than expected. For companies, this is certainly the right time to review their currency hedging strategy before it is too late. Technical point The past week in the currency market was not driven by statistics, which were few, but rather by technical movements. Many pairs are in a range situation, which is not unusual at this time of year. This is particularly the case for EUR/USD. However, we continue to believe that the pair is more likely to revisit the area around 1.08 than to rebound sustainably above 1.10. The return of geopolitical risk and the prospect of a later-than-expected rate cut by the Fed are two important arguments supporting the dollar in the medium term. We also expect the EUR/CHF pair to stabilize in the coming months around 0.93 (one to three months horizon). In mid-December 2023, the SNB indicated that large-scale FX interventions were no longer necessary and that the CHF exchange rate was appropriate. Unless there is a strong surge in short-term risk aversion, the price area around 0.93 seems optimal to us. The supports and resistances displayed below indicate, respectively, the lows and highs within which the rates should evolve during the week. Announcements to follow This week marks the beginning of the presidential campaign for the November 5 election. The Iowa Republican primary takes place on January 15. Donald Trump hopes to knock out Ron DeSantis and Nikki Haley to confirm his status as the favorite despite legal clouds. The candidates are competing for 40 delegates in this state out of a total of 2467 at stake. They are allocated proportionally. For example, if Trump wins 42% of the votes, he gets 17 delegates. Iowa is a small rural Midwestern state but important. It has a 90% white and predominantly evangelical population, making it a good barometer for Republicans. Unless there is a last-minute surprise, all polls indicate that Trump should be the Republican candidate for November. This means that we should expect a resurgence of volatility and probably a spike in risk aversion the closer we get to the election (which is still far off, however). You will find below the publications and events that should have a major impact on the evolution of currency rates.