Constant Support from Central Banks

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The macro point

Constant Support from Central Banks Macro Point The Federal Reserve meeting was expected to be a non-event for currency traders. It was not. J. Powell surprised foreign exchange market operators by adopting a particularly cautious tone regarding the recovery trajectory, notably highlighting the downside risks linked to the expansion of the pandemic in the United States. He also mentioned some inflationary pressures that could result from the Biden administration's stimulus plan and cost-push inflation caused by bottlenecks in maritime trade, but which are not likely to change the trajectory of U.S. monetary policy. Even if inflation rises in the coming months, the Federal Reserve does not plan to increase interest rates and will continue to support the economy through its asset purchase program (called QE) at a pace of $120 billion per month. In addition, there should be closer cooperation with the U.S. Treasury, headed by former Fed Chair J. Yellen, reminiscent of what existed up until the 1950s across the Atlantic. This close cooperation between the central bank and the Treasury should ensure that the recovery, even if slightly delayed due to the pandemic, is strong enough in amplitude to erase the traces of the virus on the economy. On the pandemic front, uncertainties about variants remain, but there are also some good news: Pfizer is preparing booster vaccines for the variants, the vaccine developed by AstraZeneca would be 100% effective after the first dose in case of hospitalization, and to address production difficulties, Sanofi has decided to partner with Pfizer. Finally, perhaps the most important point, Israel, which serves as a global laboratory for the vaccination process, exemplarily shows the effectiveness of vaccines in containing the pandemic. This does not mean there will not be difficulties in the coming weeks and months, with potentially more significant restrictive measures taken in some countries, but it shows there is a possible way out of the crisis.

Technical point

In the foreign exchange market, attention has mainly focused on the EUR/USD pair, not because it has experienced significant volatility over the past week (it has continued to fluctuate within the 1.20-1.22 range) but more because it has been at the heart of interventions by several members of the ECB's Governing Council. The most notable intervention was by K. Knot (representative of the Dutch central bank), who regretted that the market does not take the institution's warnings about a possible intervention to lower the single currency's exchange rate seriously. Two levers could be favored in this regard: a rate cut, with an uncertain effect on the exchange rate's evolution, and direct intervention in the exchange market, similar to the Swiss National Bank. The latter option seems unlikely. The last time the ECB acted in this manner, unilaterally, was in 2000 to support the EUR/USD exchange rate. Direct intervention in the Forex is not part of the usual tools deployed by the central bank. We continue to think it will stick to verbal interventions, with little effect on the pair's evolution. The supports and resistances displayed below indicate the respective lows and highs within which the rates should evolve during the week.

	SUPPORTS	WEEKLY	RESISTANCES	WEEKLY
	S2	S1	R1	R2
EUR/USD	1.1866	1.2002	1.2274	1.2411
EUR/GBP	0.8663	0.8693	0.8979	0.9074
EUR/CHF	1.0600	1.0661	1.0876	1.0966
EUR/CAD	1.5187	1.5343	1.5661	1.5935
EUR/JPY	124.62	125.45	128.01	128.55

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Announcements to follow

This week will be mainly focused on US and UK statistics, with a rather limited economic calendar in the eurozone. The usual highlight of the week will obviously be the US employment report to be published on Friday. After a disappointing December on the employment creation front (-123k), consensus expects a weak rebound to +65k in January. It would be a disappointing performance for the US economy, which remains hampered by both the rise in Covid cases and the implementation at the local level of stricter social distancing measures. Finally, note that the Bank of England is due to meet this Thursday, with likely maintenance of its asset purchase program. The implementation of a negative rate, which has been mentioned more or less regularly since the summer, does not seem to be on the agenda. The real lever for the British economy's recovery remains the fiscal lever, notably with the presentation of the Budget by the Chancellor of the Exchequer at the beginning of March. You will find below the publications and events expected to have a major impact on the currency rates' evolution.

DAY	TIME	INDICATOR	WHAT TO EXPECT?
01/02	16:00	ISM Manufacturing Index (January)	Consensus at 60.5 versus 60.7 previously.
03/02	14:15	ADP Non-Farm Employment Change (January)	The market expects a rise to 65k against 123k job losses in December.
04/02	13:00	Monetary Policy Decision	Status quo at the monetary policy level (rate at 0.10%).
05/02	14:30	Employment Report (January)	Job creations are expected to increase to 68k and the unemployment rate stable at 6.7% of the workforce.

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