As expected (or almost)

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The macro point

As expected (or almost)
The macro point
The foreign exchange market was not surprised by the outcome of last week's meeting of the American central bank. The institution announced the start of its tapering. The reduction in asset purchases will begin this month and will involve an amount of 15 billion dollars per month. At a constant pace, the asset purchase program could end in the middle of next year. But the central bank indicated it is willing to adjust the pace of tapering based on economic developments, particularly inflation. This flexibility in the monetary normalization process was expected. The central bank president, Jerome Powell, reaffirmed once again that he considers inflationary pressures to be temporary. They are largely linked to bottlenecks and should start gradually easing from next year, according to him. However, he denied the existence of a price-wage spiral in the United States. Economic textbooks teach us that inflation is much harder to curb when such a spiral appears. The foreign exchange market reacted quite well. It is an undeniable success for the American central bank.

In the eurozone, the president of the central bank, Christine Lagarde, provided after-sales service for her late October press conference which resulted in a monetary status quo. She again emphasized that conditions are not yet met for a rate hike next year. But the situation can quickly evolve if inflation progresses further in the coming months. For now, inflationary pressures are more contained in the eurozone than in the rest of Europe and the United States.

The only surprise last week was due to the Bank of England. The foreign exchange market consensus expected a rate hike to counter inflation, which is nearing the painful threshold of 5%. That did not happen. The central bank maintained its key interest rate at its historic low of 0.1%. Subsequently, the pound sterling fell against its main counterparts. EUR/GBP reached a high point of 0.8570 last Thursday, for example. A wide majority of the monetary policy committee members opted for prudence. They wish to ensure the labor market is still well-oriented before acting. The foreign exchange market now anticipates a first rate hike in the UK in February, by about 15 basis points. But it is too early to know if this expectation will materialize.

Finally, in emerging countries, the process of key interest rate hikes continues. The Polish central bank has adopted a very aggressive stance to combat inflation, which reached 6.8% year-on-year in October—a high point in twenty years. It increased its main interest rate by 50 basis points, from 0.75% to 1.25%. The Czech central bank, for its part, increased its rate by 125 basis points in one go, to 2.75%. In recent weeks, many central banks in Central and Eastern Europe have followed a similar approach. More rate hikes are expected by the end of the year.

Technical point

On the foreign exchange market, the EUR/USD remains in a bearish trend. The U.S. central bank meeting changed nothing. After a short consolidation phase around an important technical level (corresponding to the Fibonacci retracement level of 38.2% for those using technical analysis), the bearish trend resumed. Strong U.S. employment figures in October increased the decline. The long-term targets are clear: 1.1439 and 1.1282. The first target could be reached by the end of the year. The supports and resistances displayed below indicate the respective lows and highs within which rates should evolve during the week.

	SUPPORTS	WEEKLY	RESISTANCES	WEEKLY
	S2	S1	R1	R2
EUR/USD	1.1282	1.1439	1.1700	1.1753
EUR/GBP	0.8335	0.8404	0.8600	0.8650
EUR/CHF	1.0351	1.0485	1.0752	1.0886
EUR/CAD	1.4053	1.4200	1.4501	1.4650
EUR/JPY	129.28	130.5	132.65	134.45

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Announcements to follow

The week starting will be less intense on the foreign exchange market. The publication of the ZEW economic sentiment index in November in Germany is the most important statistic according to us. Despite all the issues related to inflation and its negative impact on economic activity, the consensus expects the index to rise to 24.0 against 22.3 in October. This statistic may create some volatility on EUR pairs. However, it has no effect on the direction of the single currency in the medium term. Finally, the ONS (equivalent of INSEE) will publish on Thursday a first estimate of the UK GDP in the third quarter. The rebound is estimated at 4.8% compared to the previous quarter. Consumption is expected to be the main driver of the recovery, as elsewhere in Europe. We estimate there should be no notable effect on the exchange rate of GBP pairs. Below you will find publications and events that should have a major impact on currency price movements.

DAY	TIME	INDICATOR	WHAT TO EXPECT?
09/11	11:00	ZEW Economic Sentiment Index (November)	Consensus expects a rise to 24.0 against 22.3 in October.
	14:30	Producer Price Index (October)	Increase to 0.3% month-on-month against 0.2% in September.
11/11	08:00	GDP Estimate for Third Quarter	Increase of 4.8% quarter-on-quarter against 5.5% previously. On a yearly basis, GDP is expected to sharply rebound, around 22.1%.
	08:00	Manufacturing Production (September)	Previous at 0.5% month-on-month.
12/11	16:00	JOLTS Job Openings Report (September)	Consensus at 10.925M.

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