Goldilocks The information presented in this publication is provided purely for informational purposes and does not constitute investment advice, an offer to sell, or a solicitation to buy, and should not be used as the basis or considered as an inducement to engage in any investment. The macro point The euro appreciated significantly against the US dollar last week (+1.93% weekly variation). However, we doubt that this movement is sustainable. The market anticipates a first Fed rate cut next May—it's certainly too early. Moreover, the growth differential still favors the dollar. You are probably familiar with the tale popularized by the Brothers Grimm in the 18th century. In its most widespread version, a young girl with blond hair ('Goldilocks') enters a house inhabited by a family of three bears who have gone out. She then tastes the three bowls of porridge, preferring the baby bear's, which is neither too hot like the father's nor too cold like the mother's. In economics, the 'Goldilocks' scenario refers to an optimal situation where growth is modest but real, and inflation is moderate. All this, without a recession, of course. This scenario now dominates financial markets following the release of inflation data in the United States. In October, the consumer price index (the most closely watched measure of inflation) fell again to 3.20% from a peak of 9.1% in June 2022. On a monthly basis, the change in prices is even zero. The US economy is returning to its long-term average inflation level of 3.30% for the period from 1914 to 2023. Energy, medical care, and automobile sales are the segments showing the most significant decline. Only transportation is at a level higher than that of June 2022. This had three immediate consequences on financial markets: The US dollar fell sharply against its main counterparts. The EUR/USD pair has returned to its levels of late August above the 1.09 threshold, for example. Profit-taking occurred at the end of last week, but in a measured manner. The United States has no interest in increasing key rates again. This risks causing undesired frictions at the level of credit and the overall stability of the financial system. The terminal rate for this economic cycle has certainly been reached. Unsurprisingly, the money market is already buzzing with rumors regarding a possible rate cut to spur the expected modest growth of the economy. Initially, the first rate cut was anticipated for June 2024. It's now scheduled for May 2024. This slight change in schedule has no major consequences on financial assets. As we have often explained here, market expectations regarding rate changes are very volatile and dependent on both central bank messages and economic statistics. On this side of the Atlantic, the terminal rate is also likely reached. The President of the European Central Bank (ECB), Christine Lagarde, indicated in an interview with the Financial Times that rates are now at an appropriate level and that a rate cut is not planned for at least the next two quarters. The money market expects a first rate cut in the eurozone in June 2024—again, this expectation is subject to change. For the Bank of Canada, the Swiss National Bank, and the Bank of England, it is only in September 2024 that the beginning of the monetary easing cycle is expected by traders. It is not yet a market topic. And yet, when it does become one, we should expect significant turmoil in exchange rates, especially for the greenback. Last week, former president and candidate Donald Trump unveiled the main lines of his economic program: increased fossil fuel production, elimination over four years of Chinese imports of steel, electronics, and pharmaceuticals, and a 10% tariff on all products imported into the United States. These are ideas likely to cause investor concern! He also promised to resolve the conflict between Ukraine and Russia in 24 hours. Not a word, however, about the situation in the Middle East. All this may seem amusing, but in view of the latest polls, he has a good chance of securing the Republican nomination despite his legal troubles. We are definitely entering pandemonium—a world of disorder and chaos (see our note from Monday, October 23). Technical point On the foreign exchange market, the main highlight is the decline of the US dollar due to anticipated rate cuts by the Federal Reserve (Fed). This allowed the EUR/USD to soar above 1.09 last week. However, we doubt that this upward movement is sustainable. The economic differential between the eurozone and the US economy still favors the latter. Moreover, the likelihood of the market getting the timing of the first Fed rate cut wrong is high. In these circumstances, it is hard to see how the euro could sustainably escape above 1.10-1.12 in the short term. Against the Japanese yen, however, the euro continues to rise and there is no major debate that this will continue. The pair is now hovering around 163 – a new record. We increasingly doubt that the Japanese authorities will intervene to curb the yen's depreciation. They would have done so otherwise already. We therefore remain positioned to buy EUR/JPY, even if profit-taking may occur in the short term after a gain of more than 3.7% in a month.The supports and resistances displayed below indicate the low and high points within which the rates should evolve during the week. Announcements to follow It's another quiet week on the economic statistics front. However, there are two major short-term points of attention:- The China-European Union summit on December 7-8. This is mainly a macroeconomic issue. There are numerous points of tension between the two economic zones, notably artificial intelligence (a field considered strategic by the European Commission), Ukraine, and the automotive sector. Last September, the European Union opened an investigation into the support and subsidies by Chinese authorities to domestic electric car manufacturers;- Capital outflows in emerging countries. This is a subject that can directly affect the foreign exchange market. In recent weeks, against a backdrop of geopolitical risk, there has been significant capital flight from emerging countries. This could harm the currencies of this region, particularly the Brazilian real and the Mexican peso. The flows are being recycled, unsurprisingly, to the United States and, to a lesser extent, the Japanese stock market.Below are the publications and events that should have a major impact on the evolution of exchange rates.DayTimeCountryIndicatorWhat to expect?11/22/202314:30USADurable goods orders (October)Previous at 0.4% month-on-month.11/24/202308:00ALLGDP for the third quarterPrevious at -0.1%.11/24/202310:00ALLIFO business climate index (November)Previous at 86.9.