Brutal

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 be used as a basis or be considered as an inducement to engage in any investment.

The macro point

We have been bearish on the EUR/USD for several months. However, we did not expect such a sharp drop over such a short period. The single currency lost nearly 2.50% week-on-week against the greenback (with a low point at 1.0077). At least three main factors explain this sudden decline: 1) traders fear a recession in the United States (as we have indicated for several weeks). The drop in the euro reflects a general appreciation of the US dollar, which serves as a safe haven in times of uncertainty; 2) we are facing a market momentum. The high trading volume on the EUR/USD increases the bearish market dynamics. This is a well-known phenomenon in the stock market and the forex market; 3) structural factors specific to the eurozone also encourage foreign investors to turn away from the Old Continent. Capital outflows have accelerated in recent weeks. This is not solely due to fears of recession. Many foreign investors also expect Europe to experience a severe energy crisis this winter if weather conditions are bad. The level of natural gas stocks is low in several European countries, especially in Germany. Energy prices continue to rise. Gas prices reached 160 euros per megawatt-hour last week on the TTF hub in the Netherlands (which serves as a reference for the entire European Union). The increase is unlikely to stop soon as Russia has decided to further cut its energy supply to Europe. The situation is so catastrophic that Germany will soon introduce a law to allow control of energy sector companies that could be in difficulty in the coming months. The fear of a severe energy crisis in Europe (which cannot be excluded) is certainly one of the important factors explaining foreign investors’ distrust of Europe. It is probably a more significant medium-term point of fragility than the risk of fragmentation in the eurozone (which we mentioned a few weeks ago with Italy’s rising borrowing costs). Under the current conditions, it is hard to see how the euro could resume rising. Across the Channel, Prime Minister Boris Johnson was forced to resign by members of the Conservative Party. His departure was welcomed by traders as the pound sterling saw an upward surge in the aftermath. The UK’s macroeconomic situation is complicated. It is certainly the only developed economy that combines wage pressures observed in the United States, the European Union’s energy crisis, and political chaos typical of emerging markets. Johnson’s resignation should not weaken the pound sterling, which has shown its strong ability to withstand all shocks in recent years (Brexit). However, politically, there is no favorite to succeed him. This is likely to be interesting. The next British Prime Minister will notably have the heavy task of managing Scotland’s independence ambitions, which plans to hold a new referendum on its membership in the United Kingdom in 2023. As almost every week, central banks continue to raise key interest rates. Inflation has not disappeared from the radar. The Polish central bank raised its main key rate to 6.50% from 6.00% previously. It is slightly less than what was expected by the analyst consensus (6.75%). This led to a decline in the Polish zloty in the forex market (-1.89% week-on-week). The central bank will continue its monetary tightening cycle in the coming months to combat the general rise in prices, which reached a staggering 15.6% in May year-on-year. The peak of inflation in many countries has not yet been reached. This also applies to France, where inflation is expected to exceed 6% in the coming months (it was 5.8% in June year-on-year, according to the latest figures). The EUR/USD pair is our major focus this week, unsurprisingly. Some analysts believe that the drop is such that one should now buy the euro. That is not our opinion. The single currency is in a bearish spiral that will be difficult to stop. The fundamentals are bad (as we discussed above). Technical analysis also corroborates the scenario of a prolonged decline. The euro broke through all strategic support levels last week. The next level to watch is at 0.9820 (below parity). As we indicated a few weeks ago, parity on the EUR/USD is not a technical level. It is merely a psychological threshold for the market. It seems obvious to us that the euro will continue its depreciation phase in the short and medium term. We can anticipate that the European Central Bank will try to intervene (verbally) to limit the decline. But the effect will be almost nil on the exchange rate. The supports and resistances displayed below 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	0.9730	0.9820	1.0371	1.0578
EUR/GBP	0.8141	0.8321	0.8695	0.8880
EUR/CHF	0.9591	0.9764	1.0283	1.0350
EUR/CAD	1.2697	1.2987	1.3386	1.3567
EUR/JPY	134.04	135.93	141.04	144.25

The economic calendar is busy. The first estimate of inflation in the United States in June will be released this week (both the consumer price index and the producer price index). The issue is whether the peak of inflation has been reached in the United States, as many analysts announce. Judging by the expectations of the bond and stock markets, the peak of inflation for the American economy would have been reached three months ago (based on inflation expectations). Finally, the Bank of Canada must once again raise its key rate to combat a level of inflation not seen in nearly forty years. The forex market expects a rate increase of 75 basis points to 2.25%. This is likely. It is already priced into the market (on all CAD pairs). We remain bearish on the EUR/CAD pair, which has been moving within a large range for nearly three months. Below you will find the publications and events that should have a major impact on currency rate changes.

DAY	TIME	INDICATOR	WHAT TO EXPECT?
12/07	11:00	ZEW Economic Sentiment Index (July)	Previous at -28. The risk of recession in the United States is expected to weigh negatively on the morale of German investors.
13/07	14:30	Consumer Price Index (June)	This is the first estimate. The consensus expects a decline in monthly variation from 0.6% in May to 0.5% in June. If confirmed, it will be a positive signal.
	16:00	Bank of Canada Meeting	The key rate is currently at 1.50%. Analysts anticipate a 75 basis point increase (it is huge, but inflationary pressures are at a 40-year high).
14/07	14:30	Producer Price Index (June)	Consensus at 0.8% monthly variation (stable compared to May).