Complicated The information presented in this publication is communicated to you for informational purposes only and does not constitute investment advice, a sale offer, or a solicitation to purchase, and should not be used as a basis or taken as an incentive to engage in any investment. The macro point A rate cut across the Atlantic is becoming less and less likely this year. The money market is now banking on just one cut next November. But nothing is guaranteed. Even Powell, during his speech last Wednesday, doubted a cut this year. In the medium term, maintaining high rates is structurally in favor of a strong dollar. This is bad news for other currencies. Expect central banks in other countries to follow the path of the Bank of Japan and intervene directly in the foreign exchange market to support their currencies. Monetary disorder to come! During its meeting last Wednesday, the chairman of the US Federal Reserve (Fed), J. Powell, was forced to strike a balance. Given the changes in inflation, he could not seriously announce a precise schedule for rate cuts. What is certain is that they will happen, but much later than expected. Inflation is persistent. Super core inflation, which measures inflation in services excluding food, energy, and rent, is rising again and is approaching 5% year-on-year. This is a problematic threshold showing that the battle against high inflation is clearly not over. However, he did offer signs of easing. He notably reduced the pace of balance sheet reduction (which resembles a measure of economic support). Starting next month, the balance sheet reduction will go from 60 billion dollars to 25 billion dollars per month. This should ensure good refinancing conditions for households, businesses, and the US government and prevent a potential financial accident in the money market. There is now little doubt that it is the European Central Bank (ECB) that will begin the rate-cutting cycle among major developed economies. It will be effective as of next month. The arguments in favor of a rate cut are multiplying. Inflation is falling, the price-wage loop is deflating very rapidly, and growth shows signs of recovery (so it needs to be supported!). Given the economic situation in the Union, we are counting on a rate cut by the ECB in June and also in July (-25 basis points each time). The interest rate decoupling that is developing between the two sides of the Atlantic is likely to result in monetary disorder. We are already seeing it in Asia. The Fed's maintenance of high benchmark rates induces a structural rise in the US dollar, and thus a drop in other currencies. Some central banks are forced to increase their rates urgently – as was the case with Indonesia recently. Others opt for direct intervention in the foreign exchange market – as was the case with Japan twice last week. But each time, the positive effect is short-lived. As long as the Fed does not change the direction of monetary policy, a generalized fall in other currencies (with a few exceptions like the Mexican peso) can be expected. This is also likely to be negative for global growth. Indeed, a strong dollar leads to higher refinancing costs for emerging countries. Technical point In the foreign exchange market, the main news concerned the Japanese yen. Authorities intervened twice directly in the FX last week: Monday and Wednesday. Each time, the central bank took advantage of a holiday, marked by lower liquidity, to intervene. According to initial estimates, Japan spent about 5,500 billion yen on Monday and about 3,660 billion yen on Wednesday. That may seem like a lot. But the Bank of Japan (BoJ) has enormous ammunition. If it wishes, it can continue to intervene for a very long time. The problem is the lack of coordination with U.S. authorities. In the past, only coordinated interventions between Tokyo and Washington had a lasting effect on exchange rates, like in the 1990s... For now, this is not the case and is not even on the agenda. Unsurprisingly, the yen eventually strengthens only slightly. Over the last five sessions, the Japanese currency is up only 0.73% against the euro and 0.89% against the U.S. dollar. We cannot say we are witnessing a trend reversal. As long as Japan acts alone, we think the long-term trend will remain bearish for the yen. Caution, though, JPY pairs are likely to experience significant short-term volatility. The trend remains bearish for the EUR/USD with a 0.20% drop over the last five sessions. We believe a return to the area around 1.05 is still possible due to the interest rate differential between the two sides of the Atlantic. But this could only materialize during the summer. The dollar remains strong – the dollar index has returned to its November 1, 2023 level. Finally, still no new developments for EUR/GBP. This pair has changed very little over the years. It remains anchored between 0.85 and 0.87. We do not see what could change this in the short term. The support and resistances shown below indicate the low and high points within which the rates are expected to evolve during the week.Weekly SupportsWeekly ResistancesS2S1R1R2EUR/USD1.05901.06221.08551.0920EUR/GBP0.83900.84240.86120.8688EUR/CHF0.95900.96330.98120.9890EUR/CAD1.44431.45221.47121.4801EUR/JPY162.55163.11166.01167.03 Announcements to follow It's a week without major announcements ahead. The BoJ interventions will certainly continue, with a weak effect on the yen. The Bank of England (BoE) meeting should result in a status quo. However, it will be interesting to know the distribution of votes while the market is still hesitant about the timing of the first rate cut. It's between June and August. The advantage of June is that it would allow coordination with the ECB and the Bank of Canada. Of the nine members of the BoE's monetary policy committee, we think seven will vote for unchanged rates and two will vote for a 25 basis point rate cut (Dhingra and Ramsden). Below you will find the publications and events that are expected to have a major impact on currency rate developments.DayTimeCountryIndicatorWhat to expect?09/05/202413:00UKCentral bank meetingNo change in monetary policy