Do Not Get It Wrong The information presented in this publication is communicated to you for informational purposes only and does not constitute investment advice, an offer to sell, or a solicitation to buy, and should not be used or considered as an inducement to engage in any investment. The macro point Finally! The Fed will start its rate cut cycle this Wednesday. It's certain. However, the market is divided on the extent of the first cut. On one side, there are those who expect the Fed to hit hard with a 50 basis point cut as the risk of recession has increased. On the other, there are those who predict the Fed will adopt a cautious approach with a 25 basis point cut. Which camp are you in? As expected, the European Central Bank (ECB) has maintained its rate cut pace – with a new 25 basis point cut. However, this is certainly insufficient given the state of the eurozone's economy. Certainly, unemployment is decreasing. But all other indicators are negative: business investment, consumer confidence, public debt development, and even the energy cost which is very high compared to the American situation. How can we have a competitive industry or even develop an AI technology sector without low-cost energy? We fear that the eurozone will plunge into a long stagnation, which will be exacerbated by demographic decline. In some ways, it's already underway. The wealth gap per inhabitant is 25% between the eurozone and the United States. On the American side, the market continues to speculate about the possibility of a recession, which however is not confirmed by any macroeconomic indicator. As we detailed in last week's edition, the manufacturing sector shows signs of fragility (this is also the case in other countries) but the American consumer is doing very well because their financial and real estate wealth has significantly increased since Covid. Historically, no recession in the United States (except for extraordinary phenomena like Covid) has occurred with such consumption dynamism. Therefore, we estimate that the Federal Reserve (Fed) will lower its key rate by 25 basis points this Wednesday. There is no need to strike hard with a 50 basis point cut as anticipated by some analysts. Over the past 40 years, excluding emergency meetings like in March 2020, the Fed has only cut its key rate by 50 basis points on one occasion. Given the state of the economy, it would be surprising if such a decision were made. Furthermore, it would be interpreted as a sign of panic by the central bank. Such a cut would implicitly confirm that the Fed fears a recession... As the market is very divided on the outcome of this Wednesday evening's meeting, it is likely that volatility will be greater on American assets, particularly the dollar, than in previous meetings. It should also be kept in mind that the Fed is 'data-dependent', meaning that its monetary policy evolves according to the latest statistics. It does not commit in advance to a rate cut pace. This starts from a good intention: to closely monitor economic evolution and avoid making bad decisions. But this also results in permanently increased volatility. Markets need visibility. This will not be the case after this week's meeting. From our perspective, after this initial cut, the Fed should lower rates twice more this year – totaling a 75 basis point cut in 2024. Unless the November presidential election is contested, we do not anticipate that the election will have any influence on the monetary policy trajectory. A Harris presidency would have as much impact on the Fed as the Biden administration; that is to say, none. A Trump presidency could increase market volatility. But it shouldn't undermine the central bank's independence. Furthermore, Trump has confirmed he does not wish to replace Jerome Powell before the end of his term. Technical point On the currency market, major pairs are still in a range situation. This is the case with the EUR/USD struggling to surpass the 1.12 mark. There is a form of wait-and-see attitude that can certainly be explained by political uncertainty across the Atlantic and the lack of visibility on the rate cut pace. Even emerging currencies are relatively stable, with the EUR/HUF (Hungarian currency) in a narrow range between 390 and 400 for several months. The only pair to watch might be the EUR/AUD (Australian currency), which is engaged in a clear downward trend – explained by the slower rate cut in Australia than in other developed economies. Some traders even consider a rate hike! The supports and resistances displayed below indicate the respective low and high points within which the rates should evolve during the week.Weekly SupportsWeekly ResistancesS2S1R1R2EUR/USD1.07441.08921.11451.1190EUR/GBP0.82800.83090.84880.8510EUR/CHF0.92550.92990.94900.9600EUR/CAD1.47821.48001.51221.5244EUR/JPY154.40155.33158.99160.13 Announcements to follow Besides the Fed, two other central banks will meet this week: the Bank of England (BoE) and the Bank of Japan (BoJ). Now that inflation is under control (except for service inflation, which remains a puzzle for most developed countries), the BoE should again cut its key rate by 25 basis points. This is already partially priced in by the market. On the BoJ side, we expect rates to remain unchanged. But the governor hinted that a 10 basis point rate hike is imminent if economic conditions allow. The latest GDP figure is encouraging: price-wage loop, rebound in consumption, business investment holding steady. We are betting on a rate hike in the fourth quarter. Note that yen carry trade is no longer an issue. According to an estimate by Goldman Sachs, about 70-75% of unhedged positions on the yen were liquidated during August. Some fear a similar event will occur with the yuan because many positions taken by institutions (especially American funds) are not hedged. This is not a concern at the moment. The positions in question are nothing in size compared to those on the yen. Nonetheless, it's a risk to keep in mind... it especially highlights the importance of always having appropriate currency hedging. Below you will find the publications and events expected to have a major impact on currency rate evolution.DayTimeCountryIndicatorWhat to expect?18/09/202420:00USACentral Bank Meeting+25 or +50 basis points19/09/202413:00UKCentral Bank Meeting+25 basis points20/09/202405:00JPCentral Bank MeetingNo monetary policy change.