British Week

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The macro point

It is certainly an unsurprising week that is starting. The major central bank meetings are behind us. They did not systematically provide the desired clarity to the market. But that is in the past. There will be no major statistics this week. There will only be discussions in the United States concerning the raising of the debt ceiling. This political drama should not cause significant disruptions in the FX market. “I do not spend my life in bakeries, even if some of you think so.” It could have been a line from a mediocre movie. It was certainly one of the most unexpected phrases uttered by the Governor of the Bank of England (BoE), Andrew Bailey, during his press conference last Thursday. It was on this occasion that he announced a 25 basis point increase in the BoE's key rate (7 votes for, 2 against). It was expected. Two notable facts stand out:

- According to the market, the BoE is certainly not done with rate hikes as operators anticipate a terminal rate close to 5% by September. This is logical since inflation is still far too high to pause monetary policy as the US Federal Reserve (Fed) is doing, for instance. This should lead to the highest policy rate in the UK since July 2008.
- At the end of last year, everyone predicted a severe recession in the UK in 2023, including BoE economists. Ultimately, it will not happen. The economic figures of recent months are even generally above consensus. This has forced the BoE to revise its growth expectations for this year. According to Bloomberg, it is even a “historic” revision of growth forecasts.

In terms of impact on the foreign exchange market, the BoE meeting did not really change the situation. The British pound ended last Thursday's session up against its main counterparts. The prospect of continuing the rate hike cycle should favor the British currency compared to the US dollar. The effect should be weaker against the euro since the European Central Bank (ECB) will also continue to increase the cost of money. The EUR/GBP pair should likely continue to move in its annual range between 0.87 and 0.90 in the short and medium term. There is no reason for this to change.

On the US side, inflation was still at the forefront last week. In April, the Consumer Price Index (CPI) was in line with expectations at 4.9% year-on-year. It is the first time in two years that the CPI has been below 5%. This is encouraging. However, it is too early to celebrate as inflationary pressures remain significant. Core inflation, which is closely monitored by the Fed, is still too high at 5.5% year-on-year (0.41% month-on-month). The main factors driving price increases have not changed since the beginning of the year. These are transportation (+11% year-on-year), food (+8.6%), and electricity (+8.4%). It is also observed that the price of used vehicles, which was a major driver of inflation in 2022, is rising again. This will need to be watched. Overall, the US figures are not bad. They validate the scenario of a monetary policy pause. But there is no indication they are moving towards a future rate cut. Recall that investors anticipate the first rate cut next September. This is certainly wrong. There will be an adjustment of market expectations during the summer, which can sometimes lead to a resurgence of volatility in currencies. It should be noted that historically the pause in the rate hike cycle (therefore the monetary policy pause) is generally the start of damages in the credit chain. This is what has been happening for about a month/month and a half, a very strong contraction of credit in the United States, which will likely lead to a dip in growth at the end of the year. There is always a time lag between the market effect (credit restriction) and the macroeconomic impact (on GDP in particular). We believe that the second half of the year could be challenging for the Fed to manage.

Technical point

In the currency market, the US dollar experienced its best weekly performance in two weeks. But the underlying trend remains the decline of the dollar index (which represents the dollar against the currencies of the United States' main trade partners). The strengthening (certainly temporary) of the dollar partly explains the pullback of the EUR/USD (1.77% drop over the last five sessions). It should also be noted that the euro currently lacks a catalyst to rise higher. All the good news (particularly the fact that the monetary tightening process should continue for several more months in the eurozone) has already been priced into market rates. In the short term, consolidation is likely to prevail for the EUR/USD pair. Note that the JPY has also regained some ground. Many traders took profits on the EUR/JPY pair. The underlying trend remains bullish as long as the Bank of Japan does not change its strategy, in our opinion.

The support and resistance levels displayed below indicate respectively the low and high points within which prices should move during the week.

	Weekly Supports		Weekly Resistances
	S2	S1	R1	R2
EUR/USD	1.0652	1.0805	1.1112	1.1266
EUR/GBP	0.8539	0.8625	0.8883	0.9010
EUR/CHF	0.9612	0.9691	0.9850	0.9950
EUR/CAD	1.4430	1.4569	1.4847	1.4930
EUR/JPY	144.40	145.18	148.95	150.67

Announcements to follow

It is a new week of transition that begins (few macroeconomic indicators and no major central bank meetings). The ZEW Index in Germany will provide us with a small insight into investor sentiment following the recent publication of very poor figures regarding trade balance and industrial production. Also note that Governor Andrew Bailey is to speak this Wednesday. There is not much to expect. In the absence of major statistics, it is likely that there will be relatively low volatility in major currency pairs this week. We will be in a scenario of continuing underlying trends.

Below you will find publications and events that should have a major impact on currency price developments.

Day	Time	Country	Indicator	What to expect?
16/05/2023	11:00	GER	ZEW Economic Sentiment Index (May)	Very strong rebound expected at 15.3 compared to 4.1 in April.
17/05/2023	11:50	UK	Speech by the Governor of the Bank of England	Nothing major
18/05/2023	14:30	UK	Philadelphia Fed Manufacturing Index (May)	Consensus at -20.0 compared to -31.3 in April. Significant improvement expected.