Free Fall

The information presented in this publication is communicated to you for informational purposes only and does not constitute investment advice, a sales offer, or a solicitation to buy, and should not be used as a basis or considered as an incentive to engage in any investment.

The macro point

FreefallThe macro pointVolatility remained high last week, particularly with euro pairs. The EUR/USD has shown a decline of nearly 8% since the beginning of the year. Traders are reducing their exposure to the single currency and are turning to the U.S. dollar. This movement is likely to continue in the coming weeks. The intensification of the pandemic in Europe raises fears of stricter measures that could harm economic activity in the fourth quarter. Some countries could even experience a contraction in GDP (Austria and Germany, for example). This is a bearish factor for the euro.

In France, the incidence rate has risen above 200. This is a first since the end of August. The government is betting on expanding vaccine coverage (opening the third dose of vaccine to everyone since last Saturday and requiring the third dose starting January 15th to maintain the health pass). Additional means will also be implemented (opening 300 new vaccination centers across the country, in addition to the 1000 centers that are still operational). But if the situation further deteriorates in the coming weeks, other measures could be taken (massive recourse to remote working, for example). A new lockdown is excluded. Support measures for activity could also be considered if necessary.

In the United States, the pandemic is under control, for now. Many positive macroeconomic indicators were observed last week. Weekly unemployment claims, which provide a real-time view of the American labor market, fell to their lowest point since 1969. Furthermore, personal spending increased by 1.3% year-on-year in October. Analysts expect an even better figure in November due to Black Friday. Household consumption remains dynamic. The only dark spot is inflation. The core PCE deflator, which is the Federal Reserve's preferred measure of inflation, reached 4.1% year-on-year in October. This is a high level that could prompt the institution to accelerate the pace of tapering. Currently, asset purchases are being reduced by 15 billion dollars per month. The market anticipates an acceleration of around 20 billion dollars per month, potentially as early as next month, and three rate hikes in 2022. These anticipations have an immediate influence on the U.S. dollar exchange rate evolution. However, it is important to keep in mind that they are highly volatile. Nothing guarantees that the Federal Reserve will raise its main rate three times next year. This seems not very credible to us.

Finally, the monetary tightening process continues in emerging economies. Last week, the governor of the Polish central bank opened the door to new rate hikes to counter inflation that reached 6.8% year-on-year in October – well above the set target of 3.5%. However, successive rate hikes do not support the Polish currency, the zloty (PLN). The EUR/PLN pair is up nearly 2.3% over the past three months. During periods of economic uncertainty, emerging market currencies tend to depreciate against currencies deemed more stable (U.S. dollar, euro, Swiss franc, etc.).

Technical point

On the foreign exchange market, the euro ended mixed last week against its main counterparts. But the fundamental trends remain intact. The decline of the euro against the US dollar should continue. This has accelerated in recent weeks with a depreciation of nearly 2.8% in one month. Traders are largely positioned to sell. They bet that the monetary policy differential between the Federal Reserve and the European Central Bank, as well as the situation on the pandemic front, will disadvantage the single currency. It's certainly only a matter of time before the next support at 1.1118 is tested. This may happen before Christmas. The supports and resistances shown below indicate the respective lows and highs within which rates should evolve during the week.

	SUPPORTS	WEEKLY	RESISTANCES	WEEKLY
	S2	S1	R1	R2
EUR/USD	1.1100	1.1118	1.1414	1.1586
EUR/GBP	0.8282	0.8337	0.8594	0.8750
EUR/CHF	1.0286	1.0389	1.0600	1.0690
EUR/CAD	1.4071	1.4167	1.4600	1.4676
EUR/JPY	125.00	126.44	130.16	131.70

For personalized advice on trends and currency hedging, contact our trading desk:

Announcements to follow

This week, the evolution of pandemic figures in Europe will remain a major focus for traders. A worsening of the situation could lead to new restriction measures. This would be negative for the euro. In the United States, US employment data for November will be released on Friday, December 3. An increase in job creations could reinforce expectations of an acceleration in tapering. The consensus anticipates an increase to 550,000 and a drop in the unemployment rate to 4.5% of the active population. This would be positive for the US dollar. Below are the publications and events that should have a major impact on the evolution of currency rates.

DAY	TIME	INDICATOR	WHAT TO EXPECT?
29/11	16:00	Pending Home Sales (October)	Increase of 1.0% after a 2.3% decrease the previous month.
30/11	11:00	CPI (November)	The consensus expects a 3.7% increase in November year-on-year (previously at 4.1%).
	16:00	Consumer Confidence from Conference Board (November)	Fall to 111.8 from 113.8 previously.
01/12	14:15	ADP Employment Report (November)	The consensus expects 460,000 job creations against 571,000 in October (subject to revision).
	16:00	ISM Manufacturing PMI (November)	Rebound expected to 61.0 from 60.8 previously.
03/12	14:30	Labor Department's Employment Report (November)	Job creations announced at 550,000 (increase) and the unemployment rate at 4.5% (decrease).

Did you like this content? Share it!