A Strong Start

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The macro point

It’s a new world. Just a year ago, we would never have imagined that two of the world’s main central banks could raise their key rate by 75 basis points the same week. Yet, that is what happened. The Bank of Canada (BoC) and the European Central Bank (ECB) did so last week. According to information from the Wall Street Journal (which is generally well-informed about the evolution of U.S. monetary policy), the U.S. Federal Reserve (Fed) is expected to do the same later this month. Despite the monetary tightening cycle that has been initiated globally since last December (when the UK raised its rates), inflation remains desperately high. In the eurozone, the ECB forecasts inflation at 8.1% this year according to its latest forecast published last Thursday. In the UK, the government predicts that the inflation peak could be between 13% and 18%. This is a wide range that reflects the difficulty in accurately predicting economic trends in a troubled economic climate (energy crisis, war in Ukraine, pandemic, etc.). During an appearance on BFM Business last Thursday, Julien Pouget, head of the economic department at INSEE, admitted that it is difficult to make forecasts beyond three months. For companies that are generally in the process of adjusting their business plans at this time, it’s a real headache to anticipate the evolution of sales, inflation, and growth in the coming quarters. Many, however, predict that it will be in 2023 when the main consequences of the current crisis will be felt. This is also our opinion. This will result in declines in investment outlooks and hiring. Cost-saving will become a priority. In terms of monetary policy, the tightening cycle should continue in most countries in the short term. The ECB has indicated there will be at least three more rate hikes at most. This means that interest rates could rise again in October, December, and next February before a pause is implemented. This is credible. It’s only from early next year that the often-mentioned recession risk in the eurozone could materialize. The occurrence of the recession will largely depend on how the autumn and winter unfold in terms of energy. All indications are that the energy-saving gestures urged by the government (like turning off wifi) will not be sufficient and that energy rationing will be necessary. In Canada, the BoC also confirmed last week that more rate hikes are to come. The key rate currently stands at 3.25%. This is above the neutral rate, which is between 2 and 3%. The neutral rate is a theoretical concept highlighted by central banks that refers to a situation where the key rate would have no effect on an economy in equilibrium. All central bankers mention it regularly (including ECB President Christine Lagarde last Thursday). But it is a very vague concept that means little. In the UK, a new Prime Minister, Liz Truss, has taken the reins of the country. Her first action was to announce a massive anti-inflation plan (the exact amount of which is not disclosed). It includes many support measures for households and energy companies: energy bill cap at 2500 GBP per month for two years, a liquidity supply mechanism for energy companies amounting to 40 billion GBP, massive deployment of renewable energy, or commitment to achieve carbon neutrality by 2050. The option of a windfall tax (which is highlighted in Germany and abundantly discussed in France) is excluded at this stage. The government believes that thanks to these various measures, the inflation peak could be 4% or even 5% lower than initial estimates. The implications in terms of monetary policy are uncertain. The prospect of a future decrease in inflation does not necessarily mean that the Bank of England (BoE) will slow its rate-raising process immediately. On the contrary, it could decide to act strongly in the short term to then be able to lower rates when the recession arrives (which is its central scenario) and inflation is under control. This is indeed what operators think. The money market anticipates an 85% probability that the BoE will raise its key rate by 75 basis points this week. On the foreign exchange market, the euro has rebounded against almost all of its main counterparts (USD, JPY, CAD, GBP in particular). The most significant rise is against the Japanese yen, which continues to weaken (an increase of the EUR/JPY by more than 2% in weekly variation). This will certainly strengthen rumors of intervention by the Bank of Japan (BoJ) in the foreign exchange market to support the yen. A weak yen is a major problem for the Japanese archipelago because it raises the cost of imports (especially for energy) and thus fuels inflationary pressures. However, we doubt that an intervention will occur in the short term. Traders have been talking about it since spring. Furthermore, from our point of view, the euro rebound will certainly not be sustainable. The economic outlook is too uncertain in the eurozone for this to happen. In most cases, we witnessed in recent sessions a technical rebound of the single currency fueled partly by the ECB's rate hikes. For example, we are still bearish on the EUR/USD pair with an initial target at 0.9784 (this is our weekly support level). The supports and resistances displayed 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	0.9564	0.9784	1.0224	1.0444
EUR/GBP	0.8352	0.8508	0.8741	0.8780
EUR/CHF	0.9466	0.9592	0.9970	1.0100
EUR/CAD	1.2698	1.2891	1.3279	1.3473
EUR/JPY	136.32	140.00	146.03	148.39

Besides the BoE meeting we mentioned earlier, this week’s current events will revolve around the theme of inflation once again. This comes as no surprise. Our belief at Mondial Change is that the inflation peak has already been reached in the United States (this is not the case in France, however). We will certainly confirm this with the latest figures on consumer prices (09/13) and producer prices (09/14) for the month of August. This does not mean that the Fed will slow its monetary tightening cycle. The inflation level is too high for there to be any easing at all in raising rates. Moreover, aside from a marked slowdown in the real estate sector, the U.S. economy is generally doing well. This gives the Fed certain leeway to continue raising interest rates in the United States. The publication of the ZEW index in Germany (09/13) is interesting for economists. However, it is rarely a statistic that has an effect on the foreign exchange market. We will not pay too much attention to it. Below you will find the publications and events that should have a significant impact on the currency rates evolution.

DAY	TIME	INDICATOR	EXPECTATION?
09/13	08:00	Change in unemployment claimants (August)	Previous: -10.5K in July
	11:00	ZEW economic sentiment index (September)	Analysts' consensus at -53.8 against -55.3 previously.
	14:30	First estimate of consumer price index (August)	Previous: 8.5% year-on-year. The consensus expects a new decline which would confirm that the inflation peak has already passed in the United States.
09/14	14:30	First estimate of producer price index (August)	Expected rebound to 0.2% month-on-month against -0.5% in July (liable to be revised).
09/15	14:00	Central bank meeting	Based on market expectations, a 75 basis point rate hike is anticipated.
09/16	11:00	New estimate of consumer price index (August)	Confirmation expected at a record level of 9.1% year-on-year.