Hawkish Pause

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The macro point

The Federal Reserve has opted for a monetary policy pause, as expected. However, this was not the case for the Swiss National Bank and the Bank of England, which caught the foreign exchange market off guard. The evolution of medium-term monetary policy is increasingly uncertain. Generally, this is synonymous with higher volatility in exchange rates, as seen with the Swiss franc last Thursday. In financial market jargon, this is referred to as a 'hawkish pause.' It means a central bank decides to keep its rates unchanged while leaving the door open for a potential increase if necessary. This was the stance adopted by the American Federal Reserve (Fed) at its last meeting last week. The key rate remains in the 5.25-5.50% range, as expected. However, twelve members of the FOMC (the body responsible for determining the evolution of monetary policy in the United States) favor another increase in the cost of money this year, potentially in November. The inflation assumption remains unchanged for 2024 compared to the initial estimate last June. However, it is clear that the price level remains the primary concern for the Fed in the short term. Inflation is expected to remain volatile in the coming months due to the surge in energy prices. The price of a barrel of oil has risen by more than 30% in three months. This is explained by both structural issues, such as the market traditionally being in a supply deficit in the second half of the year, and cyclical factors, such as the willingness of Saudi Arabia and Russia to work hand in hand to raise prices. But it is the evolution of the U.S. labor market that will be the most important parameter to monitor in the long term. The Fed anticipates a smaller increase in the unemployment rate next year. Although slowing, the labor market is resilient with job creations averaging 200,000 per month currently compared to 400,000 in the post-Covid period. In principle, a low unemployment rate does not prevent a reduction in key rates in 2024. Nevertheless, the economic slowdown will need to be more pronounced than we foresee to validate the hypothesis of a rate cut during the first half of 2024 (which corresponds to money market expectations). On this side of the Atlantic, central banks have caught the foreign exchange market off guard. The Swiss National Bank (SNB) decided to keep its key rate unchanged at 1.75%, while consensus expected a 25 basis point increase (in line with the increase in the cost of money in the euro area in September). Traditionally, the SNB's monetary policy closely follows that of the European Central Bank (ECB). This is not the case this time. The SNB has chosen to focus on preserving economic growth, in a context of generalized slowdown, rather than combating inflationary pressures, which are comparatively much weaker in the Confederation than in any other European country. This results in a rate differential between the euro area and Switzerland that is at a historic high of 275 basis points. That's huge. So far, the rise of the Swiss franc has largely been based on expectations that the SNB will tighten its monetary policy longer than the ECB (due to a delayed start). This now seems unlikely. We would not be surprised to observe unwinding of long positions on the Swiss franc in the coming sessions and weeks (which could theoretically support the euro). For its part, the Bank of England has also opted for monetary policy status quo with a narrow minority (5 members of the monetary policy committee voted in favor of keeping rates unchanged and four members in favor of a 25 basis point increase). The trajectory of British monetary policy is highly uncertain in the medium term. The United Kingdom is the perfect example of an economy in stagflation – low growth and high inflation. Even though the latest inflation figures were rather encouraging (6.7% year-on-year in August against a consensus of 7%), it is clear that the battle against high prices is not yet won. But if growth slows sharply, which is a real risk, we could face a paralyzed monetary policy (knowing that the margin for British fiscal policy is reduced). It is certainly the major developed economy in the most complex economic situation. Nevertheless, we doubt that all this exerts a strong influence on the British pound which, since the 2016 referendum, has shown impressive resilience against the euro.

Technical point

In the foreign exchange market, the underlying trend remains bearish on EUR/USD. The Fed meeting changed nothing. However, the EUR/CHF has regained some ground, as expected considering the SNB's decision. The pair now trades above the 0.96 zone. A continuation of the upward movement cannot be ruled out. A word on India since we recently expanded our foreign exchange coverage to include more Asian currencies. The EUR/INR (euro/Indian rupee) pair remains clearly on an upward trend with an increase of nearly 12% over one year. However, the trend could reverse in the future. The Indian rupee is clearly undervalued relative to economic fundamentals (real GDP growth of 4.8% on an annualized basis since 1951 and 5.9% since 1992). Especially, the Indian stock market is performing best among emerging countries and is at a historic high with a valuation of 3800 billion dollars. This is clearly a flagship argument to attract foreign investors to the country. The combination of sustained growth in a low-growth world with an influx of incoming capital is normally a key factor in long-term support for the local currency. Keep this in mind if you are exposed to the Indian market. The supports and resistances displayed below indicate the low and high points within which prices should evolve throughout the week.

Announcements to follow

This week will be quiet on the statistics front. Unusually, we will pay attention on Tuesday to the publication of U.S. consumer confidence in September (Conference Board). It's not a leading indicator. But we consider the consumer to be the real test for the U.S. economy in the coming months. It is therefore important to closely monitor all indicators related to confidence and consumption. We do not rule out a negative surprise in GDP in the fourth quarter following likely very strong growth in the third quarter. Five main factors will weigh on household budgets: the disappearance of excess savings related to Covid, the explosion of revolving credit under much less favorable conditions, rising interest rates, soaring gas prices, and the resumption of student loan repayments in October after a three-year freeze due to Covid lockdowns. It is therefore likely there will be a consumption downturn this quarter. However, this does not mean the U.S. economy faces a real recession risk. We deem it excluded. We are simply in a slowdown phase that is normal at this cycle stage. The attractiveness of the U.S. economy remains as proven by the constant inflow of foreign capital into the U.S. market. This is also a long-term support element for the U.S. dollar. Below you will find the publications and events likely to have a major impact on the currency movements.

Day	Time	Country	Indicator	What to expect?
09/25/2023	10:00	GER	IFO Business Climate Index (September)	Previous at 85.7.
09/26/2023	16:00	USA	Conference Board Consumer Confidence (September)	Previous at 106.1.
09/29/2023	14:30	USA	Core PCE Index (August)	It is the preferred measure of inflation by the U.S. Federal Reserve. Previous at 4.2% year-over-year.