Finally!

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The macro point

Finally, some good news! Inflation in the United States (measured by the consumer price index) continues to decline more rapidly than expected. In October, inflation reached 7.7% year-on-year according to the preliminary estimate. Core inflation (which omits the most volatile elements and is an important determinant of the evolution of US policy) is also down to 6.3% over the past twelve months. Obviously, these levels are still uncomfortably high compared to pre-Covid levels (inflation was then well below the 2% threshold). However, the downward trend is positive. In the short term, this should not change the trajectory of US monetary policy. The Federal Reserve (Fed) has clearly indicated that it will take several months of declining prices to consider a pause in the tightening process of interest rates. As things stand, a pause could occur at the earliest next spring. This means that the expected increase in the benchmark rate by 75 basis points in December is still relevant. The latest economic statistics also confirm that the US economy is still robust, particularly the labor market. Unemployment claims are near their low point (increasing only by +7,000 to 225,000 in the week ending November 5). It is known that the Fed closely monitors all indicators related to unemployment. At the foreign exchange market level, this means there is no reason for the dollar to lose value permanently against its main counterparts. The greenback is still supported by comparatively better economic fundamentals in the United States than in other countries and by a firmly restrictive monetary policy. Let's not be afraid to say it, this also means that the decline of the EUR/USD pair is certainly not over (down by 10% since the beginning of the year). In Europe, the real estate sector shows signs of weakening. This is linked to the rise in inflation, a drop in purchasing power (which reduces solvent demand) and tighter borrowing conditions. However, the risk is not the same everywhere in Europe. It is remembered that, in the wake of the 2007-08 financial crisis, Southern European countries were the weak link. This time it is the United Kingdom. Nationally, prices fell by 2% in October. This may seem small but it's actually significant. For more than a decade, prices have only risen. This indicates a rapid market turnaround (last August, real estate figures were still positive). If real estate prices collapse further, it could exacerbate the recession in which the UK is plunged. According to the Bank of England, the recession began this summer and it could last until mid-2024. It is hard to see how the British pound could not weaken in the coming quarters given the deteriorated economic context. We remain bullish on the EUR/GBP pair in the medium term. In France, real estate also shows signs of weakening but to a lesser extent (prices per square meter have fallen below the symbolic threshold of 10,000 euros in Paris according to Century21, for example). Three factors suggest that the price drop should be limited and manageable: the French real estate market is not in a speculative bubble (it is overvalued, however), fixed interest rates act as a safety cushion for borrowers, and household debt is comparatively low (it represents 124% of net disposable income versus a European record of 249% in Denmark). In Asia, the situation has not evolved one iota. The Bank of Japan (BoJ) reiterated last week that it maintains its accommodative monetary policy. It expects inflation to decline after spring 2023 (which is by no means certain). It continues to intervene on the foreign exchange market to support the yen against the US dollar with mixed success so far. Finally, China has denied rumors circulating two weeks ago about a possible easing of Covid health control measures. This was expected. Given the low level of collective immunity of the Chinese population and the absence of an effective vaccine, even a partial reopening of the country seems to be a risky bet. On the health front, there is no obvious solution (Beijing refuses to buy European mRNA vaccines). On the fiscal and monetary front, everything points to China seeking to further stimulate its economy in the coming months, which should involve a devaluation of the Chinese currency (the old recipes are always the most effective). Except for a few pairs (like EUR/USD), support and resistance zones have hardly changed from one week to the next in the foreign exchange market. They are almost identical for EUR/CHF and EUR/JPY, for example. The first currency pair should continue to evolve around parity in the short term. The second pair should remain around the 144-145 zone in the coming sessions. The EUR/USD performed a recovery above parity last week because traders hope (once again!) that the Fed will pivot, that is, slow the pace of rate appreciation. Nothing is less certain for now... We think the EUR/USD rebound attempt will be short-lived (as has been the case every time since mid-July). We remain bearish on the pair with an initial target at 0.9808 (which acts as weekly support). The supports and resistances displayed below indicate the respective low and high points within which the rates should evolve during the week.

	SUPPORTS	WEEKLY	RESISTANCES	WEEKLY
	S2	S1	R1	R2
EUR/USD	0.9491	0.9808	1.0333	1.0442
EUR/GBP	0.8469	0.8608	0.8885	0.9020
EUR/CHF	0.9525	0.9639	1.0103	1.0230
EUR/CAD	1.3120	1.3349	1.3800	1.3930
EUR/JPY	141.64	142.86	146.77	148.89

It's another week dedicated to inflation. The United Kingdom, the eurozone, and the United States will publish their estimates for the month of October. On the European side, it will be the consumer price index (expected to decline). On the American side, it will be the producer price index (expected to decline as well). It is an important data point for economists as it allows estimating how much inflation will be passed on to consumers by businesses. In other words, it gives an idea (admittedly imprecise) of the inflation that will hit the consumer's basket. Although we expect inflation to decline on both sides of the Atlantic, it is too early to claim victory. Recent history (1970s) has taught us that inflation can be very volatile during downturn periods. In an economic cycle, there is rarely just one peak of inflation. For example, there were three inflation peaks in the United States in the 1970s. We will have to wait at least until the beginning of next year to know if the decline in inflation is sustainable. Below you will find the publications and events that are expected to have a major impact on the evolution of currency rates.

DAY	TIME	INDICATOR	WHAT TO EXPECT?
15/11	03:00	Industrial Production (October)	Expected decline to 5.2% versus 6.3% year-on-year.
	11:00	ZEW Economic Sentiment Index (November)	New drop expected to -65.7 versus -59.2 in October.
	14:30	Producer Prices (October)	Increase of 0.4% month-on-month (stable).
16/10	08:00	Consumer Price Index (October)	Consensus at 10.0% year-on-year versus 10.1% previously.
17/10	11:00	Consumer Price Index (October)	Increase to 10.0% year-on-year versus 10.7% previously.
	14:30	Philadelphia Fed Manufacturing Index (November)	The consensus of analysts expects a figure of -5.0 versus -8.7 previously.