Inflation Again and Again

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The macro point

Inflation Once Again
The Macro Point
The economic landscape has not changed much in recent weeks. As expected, inflation is at the heart of concerns. In France, the public debate centers around rising prices and preserving purchasing power. The Minister of Economy and Finance, Bruno Le Maire, expects inflation to remain high at least until the end of next year. It's the same abroad.

The latest statistics released last week confirm that inflationary pressures are increasing everywhere. In the eurozone, the consumer price index climbed to 3.4% in September on an annual basis. As a reminder, the European Central Bank's goal is to have inflation at 2% in the long term. In Germany, indicators are turning red. The producer price index reached a high of 14.2% in September on an annual basis. The last time this indicator rose so high, Helmut Schmidt was the Chancellor of West Germany. That was in October 1974. In the immediate term, producers are willing to cut their margins. Sometimes, they put pressure on subcontractors. But if the increase lasts several months more, it will be passed on to the final consumer. The only good news regarding inflation came from the United Kingdom. The consumer price index came out at 2.9% in September on an annual basis. It's high. But it's lower than what the consensus expected (3%). However, the Bank of England anticipates that the peak of inflation has not yet been reached. The consumer price index could reach 4% by the end of the year.

It is difficult to know if inflationary pressures are permanent or temporary. It's too early. Nevertheless, current levels will encourage some central banks to normalize their monetary policy more quickly than expected. This is already the case in emerging countries. Hungary once again tightened the screws by increasing its main interest rate by 15 basis points to 1.80% last week. In major developed economies, some central bankers are questioning the opportunity for an upcoming rate increase. This is the case in the United Kingdom. This is not yet the case in the eurozone. But if inflation stays above the European Central Bank's target for much longer, expect a heated debate among governors on the next steps for monetary policy. More uncertainty regarding central bank policies generally translates into more volatility in currencies.

Technical point

On the forex market, EUR/USD has taken off again. But for a short duration, in our view. The pair shows an appreciation of nearly 0.4% on a weekly basis. It is above the psychological area of 1.16. Several factors explain the rise: the generalized decline of the dollar index due to a drop in bond yields in the United States and some slightly better than expected indicators in the eurozone, particularly the manufacturing PMI for Germany in October. However, traders are mostly bearish on the pair in the medium term. As we indicated last week, the risks facing the global economy are likely to prompt a retreat to the US dollar in the long term.

For its part, EUR/GBP seems definitely out of its range between 0.85 and 0.86 that prevailed for much of the summer. The pair is approaching the psychological threshold of 0.84. Traders are also bearish.

The supports and resistances displayed below respectively indicate the lows and highs within which prices should evolve during the week.

	SUPPORTS	WEEKLY	RESISTANCES	WEEKLY
	S2	S1	R1	R2
EUR/USD	1.1415	1.1531	1.169	1.1783
EUR/GBP	0.8365	0.8400	0.8500	0.8555
EUR/CHF	1.0573	1.0600	1.0743	1.0784
EUR/CAD	1.4106	1.4238	1.4420	1.4502
EUR/JPY	128.54	130.54	133.6	134.45

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Announcements to follow

The coming week will largely resemble the one that just ended. Inflation will still be the central focus. Three central banks are due to meet: the Bank of Canada (Wednesday), the Bank of Japan (Wednesday), and the European Central Bank (Thursday). No change in monetary policy is expected. The European Central Bank will likely try to avoid sensitive questions: the future of the Pandemic Emergency Purchase Program (PEPP) which expires in March 2022 and the trajectory of inflation. The Bank of Canada will continue its policy of reducing asset purchases as planned. A change in the policy rate is expected by consensus only in the first half of next year. Finally, the Bank of Japan meeting will be unsurprising. Usually, it is not an event that induces high volatility in JPY pairs.

Below you will find publications and events that are expected to have a major impact on currency movements.

DAY	TIME	INDICATOR	WHAT TO EXPECT?
25/10	10:00	IFO Business Climate Index (October)	The watchword is resilience. The consensus anticipates a slight increase in the index to 98.9 against 98.8 previously.
26/10	16:00	Conference Board Consumer Confidence (October)	Likewise, resilience. An increase to 110.0 against 109.3 previously.
27/10	08:00	GfK Consumer Confidence (November)	Previous at 0.3.
	16:00	Bank of Canada Meeting	Policy rate unchanged at 0.25%.
28/10	13:45	European Central Bank Meeting	Monetary policy unchanged, for now.
	14:30	Third Quarter GDP Estimate	A sharp slowdown expected. Growth should fall from 6.2% to 5.4% quarter-on-quarter.
29/10	07:30	Third Quarter GDP Estimate	Drop to 0.8% quarter-on-quarter against 1.1% in the second quarter.
	09:00	Third Quarter GDP Estimate	Expected increase to 2% quarter-on-quarter against 1.6% previously.

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