Decoupling

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The macro point

DecouplingMacro pointThe economic recovery is on the horizon, but it is highly differentiated depending on sectors and countries, and it will certainly take much longer than expected. Last week's indicators once again confirmed the significant decoupling between the manufacturing sector, which is capitalizing on the rebound in demand in Asia, and the services sector, which is still penalized by restriction measures taken in several countries. Thus, the US ISM manufacturing index reached its highest level since the start of the pandemic, at 60.8 in February. Interesting point: there is a generalized increase, affecting new orders, production, and employment. Conversely, there was a decline in service activity last month, although this decline remains contained, linked to the imposition of new restriction measures in some American States. In Europe, the decoupling is even more impressive simply because many countries are in situations of near-lockdown, leading to a marked contraction in activity in services. Furthermore, inflation in February receded in the eurozone, although this was not enough to end investors' concerns about a surge in inflation that could force central banks to normalize their monetary policy more quickly than planned. Underlying inflation (excluding energy prices—which is closely monitored by the European Central Bank) reached 1.1% in February against 1.4% in January. This decline is mainly explained by a drop in prices in the service sector. Nevertheless, concerns persist regarding the inflation trajectory, and the European Central Bank will need to show determination in the coming months to convince financial markets of its commitment to keeping rates low for as long as possible.

Technical point

On the foreign exchange market, there was no break from the trends of recent weeks. The EUR/USD remains in a zone of uncertainty, close to 1.20. In the event of renewed concerns about the economic trajectory in the eurozone, which is not at all excluded, we could again witness a drop in the pair towards 1.1810.

We also note the continued rise of the EUR/CHF (+1.25% weekly variation and +2.5% in a month). The next test for the pair is at 1.1214 in the medium term. Our year-end target of 1.15 is quite achievable.

Finally, as we indicated last week, the EUR/GBP has now entered a long-term bearish channel, which is explained from a macroeconomic perspective by the differential in the vaccination process between the UK and the eurozone. Since the beginning of the year, the pair has lost nearly 4%. While it was trading around 0.91, it has fallen back to the 0.86 area. In the medium term, our target for EUR/GBP is 0.83.

The supports and resistances shown below respectively indicate the low and high points within which prices should evolve during the week.

	SUPPORTS	WEEKLY	RESISTANCES	WEEKLY
	S2	S1	R1	R2
EUR/USD	1.1754	1.1810	1.2189	1.2307
EUR/GBP	0.8262	0.8455	0.8755	0.8839
EUR/CHF	1.0736	1.0852	1.1214	1.1453
EUR/CAD	1.4962	1.5050	1.5329	1.5447
EUR/JPY	126.23	127.42	131.17	133.65

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Announcements to follow

The highlight of the week will be the European Central Bank meeting this Thursday. It will be an opportunity for the institution to update its economic projections for the coming years. But all the attention of the foreign exchange market will likely be focused on Christine Lagarde's press conference. The stakes are high for the former IMF head. She will need to convince operators that the central bank is ready to intervene, possibly by increasing the pace of asset purchases (via QE) to prevent a bond market rate spike. The exercise will be difficult, so expect the euro pairs to experience renewed volatility on Thursday afternoon, hence the importance of carefully considering opting for foreign exchange hedging strategies. Let us add to this a probable improvement in the vaccination field as the European Medicines Agency is expected to approve the commercialization of the Johnson & Johnson vaccine on March 11. This is a revolutionary vaccine as it only requires one dose, compared to two doses for other vaccines already on the market, to be immunized against Covid. Although there are still uncertainties regarding the production pace, it is in itself very good news. Finally, the elections in Baden-Württemberg and Rhineland-Palatinate (Germany) scheduled for this Sunday will close the week. This is a large-scale test for Chancellor Angela Merkel's party, the CDU, before the general elections scheduled for September. According to the latest polls, the CDU is almost assured at this stage of retaining power in Germany. Voters praise the government's crisis management.

Below you will find publications and events expected to have a major impact on the evolution of exchange rates.

DAY	TIME	INDICATOR	WHAT TO EXPECT?
09/03	00:50	GDP in the fourth quarter of 2020	Expected to rise to 5% from 3% previously.
10/03	14:30	Core CPI (February)	Increase to 0.2% month-on-month from 0.1% previously.
	16:00	Central bank meeting	Monetary policy unchanged with a key rate maintained at 0.25%.
11/03	13:45	Central bank meeting	The ECB will need to convince of its ability to intervene if necessary to counter the rise in bond yields.
	Not defined	The European Medicines Agency must make its decision on the Johnson & Johnson vaccine	A favorable decision would accelerate the rollout of vaccination in Europe. The advantage of this vaccine is that it requires only one dose compared to two for others.

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