First Warm-up Round

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The macro point

The European Central Bank (ECB) is leading the charge among major central banks set to tighten their monetary policy in March. The issue is not what the size of the rate hike will be this month (it will be 50 basis points) but rather how far the rates will go. If the ECB is more hawkish than expected (a terminal rate higher than 4%), it will undoubtedly support the euro. In 2022, the peak of inflation was on everyone's lips. In 2023, the term 'terminal rate' is constantly heard. This refers to the rate from which central banks will stop tightening monetary policy. It is estimated that once this rate is reached, it will also signal victory in the battle against inflation. The problem is that inflationary pressures are continuously increasing. There is only one exception globally: China. The country has inflation under 2%, reflecting both the effect of the zero Covid policy (which compressed demand for years) and the absence of direct impact from the war in Ukraine. In other countries, inflation is a real headache. And since it will certainly not improve anytime soon (according to opinion surveys, service sector business leaders want to raise prices), this means the terminal rate is moving further away. It is currently estimated at 6% in the United States and slightly above 4% in the eurozone. This may be just the beginning. In the United Kingdom, C. Mann, former chief economist of Citibank and now with the Bank of England (BoE), acknowledged that talking about a terminal rate currently is probably wrong because it is a 'distant' perspective. That says it all. We must get used to the fact that the cost of money will remain durably high and refinancing conditions will be much less accommodating in the future. The rate hike is not about to end. In the United States, the prospect of a 50 basis point increase in the key rate this month has come back to the forefront following the hearing of the chairman of the Federal Reserve (Fed), J. Powell, before the US Congress last week. Until now, 90% of market players anticipated only a 25 basis point increase. This is no longer so certain. Powell acknowledged that inflation is far more widespread than anticipated in the economy and that the very good health of the job market does not allow for hope of a real decline in the wage-price spiral. He is right. Employment is holding up very well. There are still nearly two job openings per unemployed person. Resignations, which are conducive to salary acceleration, are slowing but remain at a high level. Moreover, companies do not want to part with their employees for fear of not being able to find them. As a result, the lay-off rate is only 1.1% in the private sector. It is abnormally low. The ADP private employment survey published last Wednesday also confirmed a good momentum in February, with 242,000 new jobs created. There are points of weakness (small businesses, construction, and transportation sectors). But these are weak. In mid-sized and large companies, job creation continues at an impressive pace. All of this is not good for the inflation dynamic. Across the Channel, the economic situation is also rather good. All economists expected the British economy to collapse in 2023. It will probably be less bad than expected. The British Chamber of Commerce announced last Thursday that it expects the UK to narrowly avoid a recession. But growth will remain sluggish for a long time. The country suffers from the negative structural impact of Brexit (a decrease in the intensity of international trade and a decline in non-residential investment since the 2016 referendum, which is essential for businesses to maintain production levels). The recent agreement between the European Union and the United Kingdom on Northern Ireland (which keeps the territory in the single goods market) should not be an economic accelerator. Northern Ireland only represents 2% of British production - it is marginal. Conversely, it should eliminate the trade frictions that have arisen since Brexit for companies trading between Northern Ireland and Great Britain. The issue was also discussed between British Prime Minister R. Sunak and French President E. Macron during a bilateral meeting last week on this side of the Channel. In France, the situation could worsen in the short term. Opinion surveys conducted among business leaders in the service sector show that a majority of them plan to raise prices. The problem is that services make up almost 50% of the basket used to calculate inflation. Adding to this is the surge in food products. Negotiations between distributors and suppliers will fuel the rise in the prices of basic products. It will become increasingly complicated. Not to mention the strike on March 7, which could be extended. The economic context is deteriorating rapidly in France. From a monetary policy perspective, recent inflation figures in the eurozone force the European Central Bank (ECB) to be firm. The forex market anticipates a rate hike of 50 basis points in March (this is already priced into forex rates). But it foresees that the monetary tightening cycle will continue in the short term with another rate hike of similar magnitude in May (there is no monetary policy meeting in April) and then a 25 basis point increase in June. The terminal rate (marking the end of the tightening process) is now set close to 4%. We could go beyond, depending on the evolution of inflation. At this stage, it must be recognized that making forecasts about inflation involves an unusually high margin of error. No one really knows at what level it will be in three months (not even the cohort of ECB economists). This is what the head of the INSEE economic forecasting department acknowledged at the end of 2022 during an intervention on BFM Business. Across the Atlantic, the foreign exchange market also considers that the fight against inflation may be longer than anticipated. Nomura (a bank of Japanese origin) is the first major financial institution to raise its forecast for a rate hike by the Federal Reserve (Fed) in March. Until now, 90% of market participants predicted a 25 basis point increase. Nomura suggests a 50 basis point increase. This is not our scenario. But it must be acknowledged that it is conceivable, especially if the Fed wishes to hit hard and show its determination to bring inflation back to its target of 2%. To be completely transparent, there is significant uncertainty concerning the trajectory of monetary policy in the coming months (especially regarding the magnitude of rate hikes). This should logically induce a resurgence of volatility in forex pairs (at the beginning of the year, volatility has been rather contained on many currencies).

Technical point

In the currency market, the euro did not experience its best week. The single currency is down against its main counterparts, with the exception of the Canadian dollar. The EUR/CAD pair remains well oriented upwards (+1.15% last week and +2.85% on a monthly variation). This is explained by the Bank of Canada's decision to pause monetary policy (while all other central banks continue to raise their rates to fight inflation). In the short term, the upward trend should continue. Regarding EUR/USD, the immediate fluctuation range is between 1.05 and 1.07, but we expect a resurgence of volatility in the coming sessions (see explanation below). Finally, nothing very new for EUR/GBP. The British currency is still resilient. We doubt that EUR/GBP will be able to go beyond the 0.89 zone in the immediate future. The supports and resistances displayed below respectively indicate the low and high points within which the prices should evolve during the week.

	Weekly Supports		Weekly Resistances
	S2	S1	R1	R2
EUR/USD	1.0400	1.0433	1.0683	1.0774
EUR/GBP	0.8657	0.8766	0.8904	0.8965
EUR/CHF	0.9611	0.9745	0.9922	1.0010
EUR/CAD	1.4365	1.4514	1.4746	1.4830
EUR/JPY	142.83	143.87	146.47	148.29

Announcements to follow

The coming week is going to be dense and intense. Inflation figures in the United States (consumer and producer prices) will allow for refining expectations in terms of rate increases by the Fed this month. The very hawkish tone (in favor of strong monetary tightening) of Powell has put back on the table the possibility of a 50 basis point hike. But the majority of analysts still anticipate a quarter-point increase. A strong deviation of inflation from the consensus (0.4% monthly increase for consumer prices) would give more strength to the half-point increase hypothesis. Added to this is the ECB's monetary policy meeting. The issue is not about the magnitude of the rate increase this month (it will be 50 basis points) but rather about how high rates will go. If the ECB is more hawkish than expected (terminal rate higher than 4%), it will be an undeniable support for the euro. As you understand, there will certainly be a lot of volatility in the EUR/USD this week. Below you will find publications and events that are expected to have a major impact on the currency course.

Day	Time	Country	Indicator	What to expect?
14/03/2023	13:30	USA	Consumer Price Index (February)	This is the indicator to watch this week. Analysts’ consensus expects a 0.4% increase on a monthly variation against 0.5% in January.
15/03/2023	13:30	USA	Producer Price Index (February)	Increase of 0.4% on a monthly variation after a 0.7% increase in January. So it's a bit better.
16/03/2023	14:15	EUR	Central bank meeting	No surprises expected. The ECB has been clear about its intentions: it will be a 50 basis point increase in the main rate.
17/03/2023	11:00	EUR	Consumer Price Index (February)	Low impact on FX. This is the final estimate for February. Consensus at 8.6% annual variation.