Bad News

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The macro point

The main fundamentals of the American economy are strong. Inflation remains the main issue, however. The figures released for August last week caused a small wave of panic in financial markets and pushed up the dollar index (which measures the dollar's performance against a basket of major currencies). The consumer price index (CPI) fell less than expected (8.3% year-over-year versus a consensus of 8.1%). Gasoline prices continued to decline, as they did in July. But core inflation (which excludes the most volatile items like energy and food) rose more than expected (0.6% month-over-month — double what analysts had anticipated). This is a sign that inflation is spreading across all segments of the economy, particularly in services. The producer price index (PPI), which is often considered a leading indicator of the CPI, fell unsurprisingly but remains very high at 8.7% month-over-month. There's no reason to rejoice. This supports the short-term scenario of another rate hike by the US Federal Reserve (as early as this week). At Mondial Change, we believe a 75 basis point increase is appropriate and highly likely. However, a minority of analysts anticipate a more aggressive move, around 100 basis points (30% of analysts adhere to this scenario according to the money market). Beyond the extent of the rate hike in September, recent US inflation data confirms two things. First, monetary policy is certainly not yet restrictive enough to have a real effect on inflation dynamics. Many more rate hikes will be needed to achieve this in the coming months. Secondly, inflation is very volatile in the short term. Its evolution depends on a myriad of factors, sometimes distant like the zero Covid policy in China which can have consequences on supply chains. We will certainly have to wait a few more months to know for sure if the peak of inflation is indeed behind us in the United States (that's our opinion). There are two pieces of good news, however. Retail sales in August rose by 0.3% month-over-month in the United States. This is a good performance indicating that the American consumer is still doing well despite rising prices. Sales in the services sector are particularly supported. Finally, weekly unemployment claims fell more than expected to 213,000. This is the lowest level since June and the fifth consecutive week of decline. This indicates that the labor market across the Atlantic is still in good shape (note, it should also be kept in mind that the job market is a lagging indicator relative to the economic cycle).
Closer to us, UK inflation is still out of control. In August, the CPI came in at 9.9% year-over-year. Core inflation reached a new high during this economic cycle at 6.3% year-over-year compared to a consensus of 6.2%. The inflation peak is expected to be close to 13% (optimistic scenario) and should be accompanied by a long recession lasting five quarters and leading to a GDP drop of around 2.1% according to estimates by the Bank of England. France is not immune to recession. The international bank Barclays is the first renowned institution to announce the country's entry into recession next year (GDP contraction of around 0.7%). This is realistic. But the extent and duration of the recession will strongly depend on the evolution of the energy crisis and the possibility of rationing during the winter. It is certainly still too early to know exactly what 2023 has in store for us on the macroeconomic front. For now, the French government excludes the possibility of a recession and is counting on 1% growth next year according to the 2023 finance bill (which will be officially presented on September 26). Meanwhile, new support measures have been announced including an extension of the tariff shield costing 16 billion euros. According to our calculations, the French government has put more than 60 billion euros on the table since September 2021 to 'accommodate' businesses and households facing rising energy prices. This is just the beginning, certainly. On the foreign exchange market, the king dollar is still the norm. The US currency hit new highs against several currencies last week (especially against the Canadian dollar, New Zealand dollar, British pound, and Norwegian krone). The aversion to risk that accompanies rising interest rates globally (especially the 10-year US debt interest rate) will continue to push the dollar higher. Against the euro, the dollar shows a 5.6% rise month-over-month. The EUR/USD pair has been hovering around parity for several sessions. But a more pronounced decline is inevitable. We remain bearish on the EUR/USD (this has been the case for several months). We do not anticipate any change in direction in the medium term. From a technical analysis perspective, the support level to watch this week is 0.9860.
The supports and resistances displayed below indicate the low and high points within which the rates should evolve throughout the week.

	SUPPORTS	WEEKLY	RESISTANCES	WEEKLY
	S2	S1	R1	R2
EUR/USD	0.9781	0.9860	1.0287	1.0440
EUR/GBP	0.8435	0.8575	0.8856	0.8989
EUR/CHF	0.9199	0.9413	0.9840	1.0150
EUR/CAD	1.2867	1.3031	1.3524	1.3670
EUR/JPY	140.60	141.00	144.83	146.91

This week, it's not just the US Federal Reserve that will tighten monetary policy. Others will do so. The Swiss National Bank is expected to follow the European Central Bank's lead (raising by 75 basis points). It has some leeway since the risk of recession in the Swiss Confederation is minimal. The Bank of England was initially scheduled to meet last week. This was postponed due to the death of Queen Elizabeth II. It is also expected to increase its key rate by 75 basis points. A few years ago, such large hikes were unimaginable. The norm was to cautiously raise rates by 25 basis points. That was before we entered the era of persistent inflation. Needless to say, the proliferation of central bank meetings this week increases the likelihood of witnessing a strong rebound in exchange rate volatility.
Below you will find publications and events that should have a major impact on the evolution of exchange rates.

DAY	TIME	INDICATOR	WHAT TO EXPECT?
21/09	20:00	Central bank press release and macroeconomic projections update	Expected rate hike of 75 basis points.
	20:30	J. Powell's press conference	It's unlikely that Powell will provide a clear direction regarding the medium-term rate hike trajectory.
22/09	09:30	Central bank meeting	The Swiss National Bank might follow the European Central Bank and opt for a 75 basis point key rate increase.
	13:00	Central bank meeting	Likely increase of the key rate by 75 basis points.