DUO

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The macro point

In the currency market, there are currently three major currencies in an overbought situation: the euro, the pound sterling, and the Swiss franc. This means that profit-taking is possible in the short term. The meeting of the U.S. Federal Reserve (Fed), depending on the tone adopted and the reactions of traders, could trigger a movement of short-term sales. There is some good and (a lot of) bad on the economic front. Let’s start with the only major central bank that met last week. The Swedish central bank (Riksbank) increased its rates by 25 basis points as expected. It expects the monetary tightening process to continue with at least one more rate hike, in June or September. This hike heralds another in Europe with the 25 basis point increase in the European Central Bank (ECB) key rate this Thursday. We will come back to this shortly. The other notable point is that the Riksbank indicated that a strong currency is not necessarily a negative element. Indeed, it is an effective way to limit imported inflation. This is reminiscent of the strategy of the Swiss National Bank (SNB), which has been advocating for several months for a strong CHF exchange rate to combat inflationary pressures. It has actually been quite a success since the Swiss franc is up 0.25% against the euro and 3.6% against the US dollar since the beginning of the year. In the eurozone, ECB Vice President De Guindos said he expects wages to increase substantially in 2023. Corporate profit margins should not grow at the same rate as the previous year, according to him. The rise in wages is, of course, good news for households (especially in countries where wages are not indexed to inflation, which is the case in most Union countries). But it is bad news for central bankers because it means that inflationary pressures will be lasting (risk of a price-wage spiral), thus forcing the ECB to increase the cost of money more sharply in the medium term. A priori, structurally higher rates in the eurozone should, however, provide significant support to the euro. This dynamic is partly the reason for the appreciation of the single currency in recent sessions. On the other side of the Atlantic, the economic outlook is deteriorating. The American consumer is beginning to show signs of weakness. The Conference Board’s index for April fell to 101.3 against 104.0 expected by the consensus of economists. The problem is not so much the current situation (up compared to March) as future expectations (sharp drop from 74.0 to 68.1 in one month). It seems that the prospect of a recession (or at least a difficult economic period) is being factored in by American households. This is rather unfortunate for President Biden, who wishes to be re-elected for a new and final term. The polls are far from being in his favor at this stage. The regional manufacturing indicators published last week (Dallas, Empire State, Richmond, Philadelphia) also confirm that the economic dynamics are experiencing a sharp slowdown. McDonald’s CEO Chris Kempczinski (more than 14,000 restaurants across the United States) bases his estimation of the slowdown on a somewhat peculiar indicator (anecdotal?): his customers are less and less often ordering fries when they place an order. This is a sign that things are not going well. Part of the reduction in activity can be explained by the troubles of the American banking sector. As was the case during the 1980s during the savings and loan crisis (more than 3,000 financial institution failures over ten years), banking players are granting less credit (in this case, especially less commercial credit). In a highly leveraged economy like that of the United States, fewer incoming credit flows invariably mean less growth in the short and medium term. It is likely that we will soon again be talking about the risk of recession in the United States. However, note that this risk is not yet perceptible in the economic data! Therefore, one should refrain from drawing conclusions too hastily. Even if growth is slowing, it is still respectable. It reached 1.1% on an annualized basis in the first quarter. Exactly a year ago, it had contracted by 1.6%. We can talk about a slowdown but not yet a collapse.

Technical point

In the forex market, the big winner at the start of the year is the euro. The EUR/USD pair has risen by nearly 3% since January. Long gone are the days when traders were short (sellers) on the euro because they feared the energy crisis would cause a severe recession. If we look at the CFTC's Commitment of Traders report (which provides insights into professional traders' positions in the foreign exchange market), the euro is currently in an overbought position. This is also true for two other major currencies: the British pound and the Swiss franc. Thus, we do not rule out short-term profit-taking on these currencies. This is generally what happens when a currency is overbought. The US Federal Reserve (Fed) meeting, depending on the adopted tone and operators' reactions, could trigger a profit-taking movement. It will therefore be particularly important to be vigilant this week and especially to remember to adopt the right risk hedging strategy.

The supports and resistances displayed below indicate respectively the low and high points within which exchange rates should evolve during the week.

	Weekly Supports		Weekly Resistances
	S2	S1	R1	R2
EUR/USD	1.0884	1.0776	1.1232	1.1288
EUR/GBP	0.8540	0.8740	0.8950	0.9091
EUR/CHF	0.9467	0.9629	1.0034	1.0220
EUR/CAD	1.4480	1.4743	1.5237	1.5485
EUR/JPY	142.80	145.15	149.83	152.20

Announcements to follow

It's a busy week starting. The Fed meeting will be the main marker for currency developments. Economists' consensus anticipates that the US central bank will raise its key rate by 25 basis points (between 5.00 and 5.25%) and open the door to a monetary policy pause. This is justified in light of the latest economic statistics we have discussed. It is certain that the meeting will cause a rebound in volatility on USD pairs. It is customary. Traders also predict that the Fed will be forced to lower its rates this year (in November next according to futures contracts). But it's unlikely that this will be a topic discussed by FOMC members at this stage. It's too distant an horizon for monetary policy. In the eurozone, the issue is lesser. The latest ECB minutes showed that a minority of Governing Council members fear tightening monetary policy too substantially. According to us (and it's also the view of most of the market), a 25 basis point hike in the benchmark rate is a consensual scenario. Further rate hikes are likely by the summer in the eurozone (certainly during the June meeting).

Below you will find publications and events that should have a major impact on currency movements.

Day	Time	Country	Indicator	What to Expect?
05/03/2023	14:15	USA	ADP Non-Farm Employment Report (April)	Increase to 150k vs. 145k previously. Note, this is not a very good barometer of US employment dynamics.
05/03/2023	20:00	USA	Central Bank Meeting	Key rate increase of 0.25% within a range of 5.00% and 5.25%.
05/04/2023	14:15	EUR	Central Bank Meeting	Main rate increase of 25 basis points.
05/05/2023	14:30	USA	Department of Labor Employment Report (April)	Employment dynamics expected to slow: 181,000 new jobs in April vs. 236,000 in March.