Central Banks in the Spotlight

The macro point

The financial markets looked like a rollercoaster last week. The week started poorly with a collapse of almost all financial assets, including the dollar and gold, following a sharp drop in American tech stocks on Monday, March 10. Analysts even began talking about the risk of a U.S. recession... or even a financial crisis. And then there was very good news: U.S. inflation slowed down. This wasn’t a foregone conclusion. In February, consumer prices fell to 2.8% year-on-year – against a consensus of 2.9%. Moreover, core inflation, which is more important for understanding price dynamics, decreased to 3.1% versus a consensus of 3.2%. This is the first time since July 2024 that consumer prices and core inflation have both fallen together. Unsurprisingly, those who initially started fearing a bleak scenario for the U.S. economy had to reassess...

Looking at the numbers, the U.S. economy is generally in good health. The impact of customs tariffs is noticeable through a resurgence of caution among economic players (consumers are trying to save, while many companies think twice before planning significant investment projects). However, the trade war currently has no real effect on price dynamics. We still anticipate a good first quarter, with growth expected to be between 2% and 2.2% on an annual basis. This is significantly better than the eurozone's performance over the same period.

There is obviously a lot of noise in the financial markets due to the daily announcements and reversals from the White House. It is by looking at economic data that one can try to see more clearly. For now, there's no reason to panic. The worst-case scenario in our view: a slowdown in the U.S. economy, with GDP growth this year potentially closer to 2% than 2.3% (our January forecast). By comparison, we estimate that growth in the eurozone should only be 1% this year.

A point to watch in the short term as it can have consequences on inflation and commodity currencies: the high volatility of the oil barrel. The Trump administration officially aims for $50 (compared to $67 currently), which would reduce inflation by at least one percentage point according to the White House. However, there's a problem. If prices fall that much, it could jeopardize the future of American shale oil producers. According to a Dallas Fed study, they need a barrel price of $60 to be profitable. It’s likely to be complicated. But the Trump administration is accustomed to contradictory injunctions...

Technical point

On the foreign exchange market, the U.S. dollar is a bit shaken. But it remains the undisputed king. According to estimates by Gavekal, the dollar accounts for 50% of global payments – a twelve-year high. Conversely, the euro's share continues to decline. The Chinese yuan's share has been increasing significantly in recent years...starting from a very low point.

As for the yuan, it remains remarkably stable against the greenback. A few months ago, analysts anticipated a sharp depreciation or even a devaluation to face the trade war. Missed! The yuan is trading between 7.00 and 7.20 against the dollar.

The euro stays on an upward trajectory against the dollar, with an increase of over 5% in the space of a month. Despite this, the single currency is still significantly undervalued against the greenback. Based on the purchasing power parity, which is a reference, the undervaluation is about 30%. It's huge.

Announcements to follow

This week is very busy in terms of economic calendar with several central bank meetings. Except for the Swiss National Bank (SNB), a monetary status quo is expected for the others. Regarding the SNB, market consensus expects a 25 basis point cut in the key rate (already priced into the markets). But we are not safe from a surprise with a larger cut. Inflation continues to decline in the Confederation, reaching a four-year low in February. To prevent it from falling below the target range of 0 to 2%, the SNB has no choice but to lower the cost of money. This expected rate cut announces others. We predict that the key rate will be set at 0% during the meeting on June 19. This obviously opens the door to the future implementation of negative rates if deflationary pressures persist – which is likely.

On the side of the American Federal Reserve, we expect the key rate to remain unchanged. There are too many short-term uncertainties. The United Kingdom should also not change its rates. After a rate cut in February, the Bank of England should wait for the second quarter to act again. No surprises finally from the Bank of Japan. It has given investors a rendezvous this summer for a possible new rate hike, if conditions permit.

The information presented in this publication is provided for informational purposes only and does not constitute investment advice, an offer to sell, or a solicitation to buy, and should not be used as a basis or be considered an incentive to engage in any investment.