Hawk

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The macro point

It's the word of the week. In French, hawk literally means faucon. This term also has another meaning in the realm of central banks. It refers to a person in favor of tightening monetary conditions. In just a few days, we've seen a flurry of hawkish comments from central bankers in the United States, Canada, the eurozone, and even Switzerland. Across the Atlantic, Jim Bullard, known as the most hawkish member of the FOMC (the body that sets monetary policy), advocated for accelerating the rate hike process so that the cost of money reaches 3.5% this year (compared to a range between 0.75% and 1% currently). Many economists believe such a rate could effectively lower inflation sustainably but also risk pushing the US economy into a recession. For now, the core scenario for US monetary policy remains unchanged: a 50 basis point rate hike in June and then in July before a possible pause in September, depending on the latest macroeconomic data (concerning both price trends and growth). In Canada, the central bank raised its policy rate by 50 basis points as expected, to 1.50%. This was no surprise to currency traders. The statement released following the announcement was interesting: it opened the door to faster monetary tightening. The next time the central bank raises its rate, it might decide to hit harder by opting for a 75 basis point increase. The money market now anticipates that Canada's policy rate will reach 3% by the end of the year, compared to a pre-meeting forecast of 2.75%. This should continue to favor the Canadian dollar against the euro in the medium term (in the eurozone, rate hikes are in sight, but they are likely to be less pronounced than in Canada). In Switzerland, inflation is comparatively lower than in most other developed economies. The consumer price index (CPI) reached — only — 2.9% in May on an annual basis. But the Swiss National Bank (SNB) does not hide its concern about the current dynamics. It fears reacting too late. It doesn't want to wait until inflation is out of control (as is the case in the eurozone, for example). It is likely that the SNB will opt for foreign exchange intervention to contain inflationary pressures (a channel of intervention it knows well). Contrary to what it has done in recent years, it could decide to sell foreign currencies (EUR and USD in particular) to buy Swiss francs. This would have the effect of strengthening the CHF exchange rate and, by extension, reducing imported inflation. We have already discussed this previously. Given the macroeconomic context that has drastically changed in a few months, we wouldn't be surprised if the SNB views a drop in EUR/CHF towards parity in the medium term favorably. This was a completely ruled-out scenario just a few months ago. Finally, the latest inflation figure in the eurozone is alarming. The consensus of economists expected the CPI to reach 7.8% in May on an annual basis. It was 8.1% — a new record. Many analysts are beginning to criticize the European Central Bank's (ECB) inaction. This inaction is also now openly criticized by members of the hawkish minority on the Governing Council. Immediately after the inflation publication, Robert Holzmann advocated for a 50 basis point rate hike next July (the consensus anticipates an increase of only 25 basis points, which should not objectively have much effect to counter the surge in prices). Everything suggests that tensions will increase among Council members in the months to come regarding the path of rate hikes to follow. A less readable monetary policy means, at the very least, renewed volatility for the euro. Indeed, this is what happened in recent sessions. The one-week implied volatility on the euro increased significantly, rising to 9.0 against 7.0 at the end of May. We expect the single currency to remain volatile in the short term. Our view remains bearish on EUR/USD. The pair has repeatedly failed over the past month to sustainably cross the 1.08 threshold, which could have allowed a fundamental trend change. As long as EUR/USD is below 1.08, a return to 1.05 is possible. The euro is still trending downwards against the Canadian dollar as well (a 1.44% drop last week and a 5.92% decline since the start of the year). The combination of a very restrictive monetary policy in Canada and continuing energy commodity price increases (oil prices jumped 11% in a month) should provide lasting support for the CAD against the EUR in the coming months. A drop in EUR/CAD below 1.34 is no longer ruled out. The supports and resistances shown below indicate the low and high points within which the prices should move this week.

	SUPPORTS	WEEKLY	RESISTANCES	WEEKLY
	S2	S1	R1	R2
EUR/USD	1.0550	1.0390	1.0800	1.0870
EUR/GBP	0.8400	0.8370	0.8636	0.8724
EUR/CHF	1.0168	1.0046	1.0410	1.0532
EUR/CAD	1.3400	1.3303	1.3632	1.3771
EUR/JPY	134.85	130.74	141.68	143.07

The ECB meeting will be the main point of attention this week. A minority of analysts in the foreign exchange market does not rule out that the ECB, due to internal pressure from hawks, might decide to accelerate its schedule and raise its policy rate as early as this Thursday. This hypothesis seems absurd to us. It would completely counteract the forward guidance the institution has implemented in recent years (which consists of communicating as clearly as possible on short-term monetary policy to channel market expectations). We think this week's meeting will simply lay the groundwork for a policy rate hike next July. For the record, the only two times the ECB raised its policy rate in July were right before the eurozone's entry into recession... Below are the publications and events that are expected to have a major impact on currency rates.

DAY	TIME	INDICATOR	WHAT TO EXPECT?
06/07	10:30	PMI Indicators of activity in services and manufacturing sectors (May)	This is a second estimate — no impact on the forex market.
06/09	13:45	Central bank meeting	The ECB will lay the groundwork for a 25 basis point policy rate hike next month. This is largely priced in by the market already.
06/10	14:30	Consumer Price Index (May)	The issue is simple: has the inflation peak already been reached as indicated by several analysts? That’s what the consensus believes, with expectations of inflation decreasing to 8.1% annually in May from 8.3% in April.