Central Bankers Return from Break

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The macro point

This week, the American Federal Reserve is back. The money market estimates that a rate cut is almost certain next May. And what if the central bank only lowers the cost of money much later in the year, for example in the second half? This is not improbable. It would, in any case, be an unexpected supportive factor for the US dollar. Everyone focused on the European Central Bank (ECB) last week. But there was finally nothing to expect. As planned, it refrained from committing to a specific timetable for rate cuts. It continues to worry about a potential wage-price spiral (which is not really perceptible across the eurozone as a whole) and the impact on inflation of the paralysis of international trade (traffic at the Suez Canal is almost stopped). It will certainly take several months before seeing more clearly. The Bank of Canada (BoC) was the other central bank that met last week. Again, no change in monetary policy. However, it indicated that the rate hike cycle is over. The future looks complicated: service inflation peaked mid-2023 but inflation remains high in some sectors of the economy and, to make matters worse, the scenario of a hard landing (recession) is taking shape. Canada is not the only developed country in this situation. The latest PMI activity indicators for the eurozone (notably for France and Germany) paint a rather bleak picture of the economic situation. Germany is expected to be in recession all year 2024 and France is also at risk of entering recession (GDP contraction in the fourth quarter of 2023 and probably also in the first quarter of 2024). The good news is that the possible extent of the recession should be limited (nothing like the financial crisis of 2007-2008 or even the eurozone debt crisis). The real news last week was China’s attempts to support part of the economy. The Chinese stock market has been collapsing since last August – a sign of the lack of confidence of international investors in the country's economy. Outgoing capital flows are reaching record levels. To stop the decline, the government is considering a support plan of about $287 billion consisting mainly of stock purchases by local investment funds. For now, it is not effective. Stock market sentiment remains negative. Above all, the Chinese central bank announced a 50 basis point cut in the banks' reserve requirement rate, effective from February 5th. This will theoretically inject nearly 1,000 billion yuan into the economic circuit. It may seem a lot. But given the size of the Chinese economy, it's little. Part should be allocated to support the real estate sector, which is still struggling. Another part will increase liquidity just before the Chinese New Year (starting February 10). Usually, this holiday period coincides with a drop in liquidity and a tendency for the yuan to rise (high demand for cash). According to us, China's goal is to avoid a liquidity accident, as the economy has many points of fragility. This in no way predicts a massive stimulus, particularly via the budget. Last December, and this was confirmed later, Beijing announced it would refuse any increase in public spending in 2024 by the central government and local governments. Those hoping for a stimulus like in 2015 will be disappointed. Chinese growth will likely stabilize in the coming years around 4% per annum. It's little given China's stage of economic development.

Technical point

On the foreign exchange market, the dollar index reached a one-month high following Trump's victory. Adding to that the uncertainties about the pace of rate cuts on both sides of the Atlantic (a topic we discussed extensively last week), everything logically leads to a decline in EUR/USD. The pair has fallen by 1.4% since the start of the year. We expect the downtrend to continue. Against its other counterparts, the euro is rising. The increase in EUR/JPY is the most notable phenomenon of the past week (+2.8% since the start of the year). Now that traders have realized the Bank of Japan will not soon normalize its monetary policy, sellers are having a field day on the Japanese yen. The euro is also rising against the Canadian dollar (CAD), but to a lesser extent. This is mainly due to a decline in the CAD, the currency being penalized by the very low level of commodities, especially oil. It is, according to us, a lasting phenomenon. The supports and resistances listed below indicate the low and high points within which prices are expected to evolve during the week.

	Weekly Supports		Weekly Resistances
	S2	S1	R1	R2
EUR/USD	1.0600	1.0677	1.1009	1.1099
EUR/GBP	0.8413	0.8499	0.8683	0.8712
EUR/CHF	0.9288	0.9309	0.9503	0.9699
EUR/CAD	1.4488	1.4589	1.4834	1.4899
EUR/JPY	157.44	159.09	161.77	162.88

Announcements to follow

On the foreign exchange market, we remain in a favorable environment for the U.S. dollar (up 0.40% against the euro in weekly variation, for example). This is partly explained by the high geopolitical risk but especially by the strengthening of long positions by investors just before the Federal Reserve meeting on January 30 and 31. The resilience of the U.S. economy, once again proven by the publication of U.S. GDP in the fourth quarter, is another supporting element. The maintenance of a high dollar should lead the EUR/USD pair to rally in the 1.07 area in the short term, in our opinion. Many pairs also continue to remain in a range-bound situation. This is the case of EUR/GBP and EUR/CHF. Finally, short positions continue to accumulate on the Japanese yen. The money market foresees a possible normalization of rate policy in Japan potentially in the second quarter, but this could be postponed to later. In any case, for now, there is not enough visibility on Japanese monetary policy for the yen to recover. The rise of EUR/JPY should continue in the coming sessions and weeks. Below you will find publications and events that should have a significant impact on currency movements.

Day	Time	Country	Indicator	What to expect?
01/30/2024	16:00	USA	Consumer Confidence from Conference Board (January)	Previous at 110.7.
01/31/2024	14:15	USA	ADP Employment Survey (January)	Previous at 164k. Note, low reliability.
01/31/2024	14:30	USA	Central Bank Meeting	No change in rates expected.
02/01/2024	13:00	UK	Central Bank Meeting	No change in rates expected.
02/02/2024	14:30	USA	Department of Labor Employment Report (January)	Previous at 216k (quite respectable) and unemployment rate at 3.7% of the labor force.