Fed and ECB Now Moving in Step

The macro point

Barring any surprises, the key rate schedule will no longer distinguish between the dollar and the euro by the end of the year. The Fed and the ECB are expected to pause at the end of October, then raise their rates in December. Thus, the next movements of the EUR/USD will mainly depend on energy and the gap between the published US inflation and the consensus.

On the American side, expectations have quickly changed. Barely was the key rate raised between 3.75% and 4.00%, on September 29, futures markets gave nearly a 75% chance of a new hike as early as October 28. This probability has dropped below 20%: John Williams (Fed of New York) ruled out any rushed increase, then the US only created 29,000 jobs in September. Postponed, the hike is not abandoned: its probability by December reaches 84%.

The ECB would follow the same schedule. Of 73 economists surveyed by Reuters on October 8, 70 expect the deposit rate to remain at 2.50% on October 29 and 64 anticipate a rise in December. Since this schedule is expected, its revisions are mainly what will move the exchange: all things being equal, part of the capital tends to flow towards the currency whose rate advantage increases. The anticipated rate gap remains exposed to surprises, especially in inflation.

On the market, the euro has fallen five consecutive weeks, less clearly the last one; it was worth 1.1210 dollars this morning. According to us, energy remains the underlying risk for the single currency, as the oil surge worsens the external balance of the eurozone, a net importer, while the US is a net exporter. The weekend attacks on Riyadh and tankers near Hormuz keep this risk alive.

US inflation, expected on Wednesday, remains. In August, US consumer prices rose 3.4% year-on-year, and 2.4% excluding food and energy; those in the eurozone, in September, 3.8% and 2.5%. The excess inflation is thus mostly due to energy, but the core consumption expenditure index, favored by the Fed, increases by 3.0% annually. Core inflation above the consensus would revive the hypothesis of a rate hike as early as October, benefiting the dollar.

Technical point

Speculators were still heavily betting against the euro last week. Their net short position on futures markets reached 99,300 contracts on Tuesday, October 6, up 36,000 in a week. Core inflation below the consensus would encourage these sellers to buy back euros. According to us, these buybacks would speed up a rise of the EUR/USD to 1.13, while a drop to 1.11 would be more gradual.

Liquidity is reduced this Monday: the US bond market, Canadian markets, and Tokyo are closed. Brent fluctuated with the news: priced at 105.48 dollars at the opening, it returned to around 103.90 dollars when Washington mentioned Russian diesel deliveries. The EUR/CAD (1.5977) and EUR/JPY (177.27) did not move much. When counterparts become scarce, the same order flow moves rates further: only Tuesday’s session, with normal liquidity, will therefore confirm these levels.

The EUR/GBP and EUR/CHF did not vary much either. This morning, the euro was worth 0.8463 pounds and 0.9299 Swiss francs; on the British side, the rate hike expected on November 5 is already priced in. The weekly levels below, set at a fixed distance from Monday's rates, are therefore just markers.

The supports and resistances shown below indicate respectively the lows and highs within which rates should evolve during the week.

Announcements to follow

Tuesday opens the session on the French budget examination, of which the finance committee rejected the revenue part last Friday: the yield gap between French and German government bonds may therefore widen. On Wednesday, US September inflation dominates the agenda: the consensus expects it to accelerate, while its underlying rate remains nearly stable. On Thursday, US retail sales and the UK August GDP could guide the dollar and the pound.

Below you will find the publications and events that are expected to have a major impact on the currency rates evolution.

The information presented in this publication is provided to you for informational purposes only and does not constitute investment advice or an offer to sell, nor a solicitation to buy, and should in no case be used as a basis or be considered an incentive to engage in any investment.