It Comes and Goes

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The macro point

Russian President Vladimir Putin has been ambivalent all last week about the progress of negotiations with Ukraine. It is becoming increasingly clear that a diplomatic solution is not within reach. Russian troops continue to position themselves in various parts of Ukraine and sometimes refuse to open humanitarian corridors to evacuate civilians. Traders who once believed in a quick positive outcome were quickly disillusioned in recent sessions.

The return of inflation is another concern. And it will certainly not change anytime soon. The coming months will be tough for consumers and businesses in the Old Continent. That is essentially the message conveyed by the European Commission's economic sentiment index published last Wednesday. It is an important statistic because it is used by economists for their GDP growth forecasts. In March, economic sentiment fell by 5.4 points to 108.5. All sectors are affected but the most significant decline concerns consumer confidence. Companies continue to worry about supply chain disruptions and are planning to reduce production or, in some cases, temporarily cease operations due to the difficulty in obtaining inputs. The resurgence of strict lockdowns in China, of course, does not help the situation (Shanghai has been locked down since March 28). All this will fuel inflation, which is already rampant in several eurozone countries. In Spain, the consumer price index reached 9.8% year-on-year in March. This is the highest level since 1985. It is also much higher than what the consensus of analysts expected (8%). In France, inflation is also uncomfortably high but remains significantly lower at 5.1%. The combination of a widespread price rise that hurts consumption and persistent supply chain difficulties is likely to significantly disrupt economic activity in the second quarter. We do not rule out that the eurozone GDP could be in negative territory from April to June before rebounding in the third quarter. It is clear that the economic outlook has deteriorated significantly in a matter of months. At the beginning of January, everyone agreed that the economic rebound would still be strong in 2022 thanks to vaccination advances and the lesser severity of the Omicron variant. This was not accounting for China's zero Covid policy and the Russian invasion of Ukraine.

Despite the rise in inflation, the European Central Bank (ECB) does not seem ready to tighten its monetary policy more quickly than expected. The institution considers the inflationary pressures not to be lasting and primarily linked to the war in Ukraine. This is highly debatable. In a speech last Wednesday, ECB President Christine Lagarde also denied that there is a risk of stagflation in the eurozone (which can be defined as a sharp decline in economic growth accompanied by widespread and rampant inflation). Yet more and more economists consider this a credible scenario, particularly for Germany in light of the latest statistics (IFO business climate and ZEW economic sentiment indices). From our perspective, the ECB will be compelled in the coming months to adjust its monetary policy differently and recognize that inflation will be a long-lasting and difficult problem to resolve in the eurozone. It is not unlikely that European politicians (especially in Germany) might get involved in monetary policy if they believe the ECB is slow to respond. In the medium term, this could result in a more restrictive monetary policy which, theoretically, can support the euro exchange rate against other currencies (obviously, other factors must also be considered).
In the immediate term, the EUR/USD continues to fluctuate in a broad range between 1.0816 (main support zone) and 1.1296 (main resistance zone). The pair is expected to exhibit a lateral movement in the coming sessions. There are no announcements expected to change this scenario. On a weekly basis, the euro has recorded significant gains against the yen (1.16%) due to decreased risk appetite and against the British pound (1.23%). However, the upward movement of the EUR/GBP might be halted at the resistance level of 0.8519.

The supports and resistances displayed below indicate the low and high points within which prices are likely to move during the week.

	SUPPORTS	WEEKLY	RESISTANCES	WEEKLY
	S2	S1	R1	R2
EUR/USD	1.057	1.0816	1.1296	1.1536
EUR/GBP	0.8038	0.8229	0.8519	0.8612
EUR/CHF	0.9901	1.0085	1.0340	1.0455
EUR/CAD	1.3203	1.3511	1.4127	1.4432
EUR/JPY	128.79	132.27	137.48	139.24

This week will be calm in terms of statistics. The publication of the eurozone PMIs will attract little interest given that it is a second estimate. Generally, there is no significant deviation from the first estimate. Industrial production in Germany in February could confirm the risk of stagflation we mentioned for the country. Otherwise, there are no other really notable statistics. It is a transition week before the week of April 11, which will be a bit busier (several inflation figures for the United States are expected).

Below are the publications and events that should have a major impact on currency movements.

DAY	TIME	INDICATOR	WHAT TO EXPECT?
04/05	10:00	Composite PMI (March)	This is the second estimate. Marginal impact on currencies.
	16:00	Non-manufacturing ISM (March)	Good figure expected for the United States: 57.9 against 56.5 in February.
04/07	08:30	Industrial production (February)	Previous at 2.7% month-on-month. The reported figure should not take into account the effect of the war in Ukraine.