It Stings The information presented in this publication is provided for informational purposes only and does not constitute investment advice, an offer to sell, or a solicitation to buy, and should not be used as a basis or considered as an incentive to engage in any investment. The macro point The playing field for upcoming sessions should hold few surprises in the foreign exchange market. Apart from the ongoing consolidation in EUR/USD, which could continue to the support area at 1.0865, the trend remains unchanged for the main currency pairs. Traders remain optimistic and are seeking yield, theoretically benefiting currencies with the highest interest rates. There are days when it’s better not to get up. This is certainly what Andrew Bailey, head of the Bank of England (BoE), must have thought last Wednesday. He must have had a bad day. British inflation for the month of March was expected to be a non-event. It ended up surprising on the upside. The consumer price index reached double digits at 10.1% year-on-year. But it gets worse. Underlying inflation (which excludes volatile products and indicates how deeply inflation is embedded in the economy) continues to hover around 6% on a monthly basis and has been for nearly a year. High inflation is driven by both corporate margins (as is the case in the eurozone), soaring food prices, a labor market that continues to see substantial wage increases after ten years of moderation, and finally Brexit. In many ways, the UK perfectly summarizes the challenges facing central banks in the current economic cycle. Although lower economic growth is desirable to combat inflation (since suppressing demand can lower prices), it is politically and socially complicated to implement. It’s clear that choosing recession (and it will certainly need to be significant to really bring inflation down to 3-4%) leads to particularly negative social consequences. The BoE has chosen not to cross the Rubicon and has been hesitating for several months on the stance to take, opening the door to a pause in monetary policy even though disinflation has not yet begun. Given the figures released last week, it is hard to see how the BoE could not opt to raise its key rate by 25 basis points next May. It must send a clear signal to financial markets about its willingness to return to more moderate inflation. But the damage is done. It was slow to react. It is paying the price now.The British situation is extreme. It is exacerbated by Brexit. But it is not unlike what many other countries, at different levels, are also experiencing. In the eurozone, inflation is also rooted in the economy. Corporate profits and food products have taken over from energy in 2023. Fortunately, there is no wage-price spiral in the Union, otherwise it would be worse. But nearby, in Eastern Europe, wage increases are very much a reality and continue to fuel double-digit inflation (year-on-year). Except in certain countries (United States, Czech Republic, Asian countries), the disinflation process is still far from being on the right track. What is surprising is that many central banks have chosen to pause the monetary tightening process, mainly due to concerns about the impact of rising rates on financial stability. This is the case with Canada, for example. These countries are therefore choosing inflation. They accept that the new normal in terms of rate increases is around 3.4, sometimes 5% instead of the traditional 2%—a level that has no scientific basis and has been established since the early 1990s in developed economies. In the eurozone, the publication of the European Central Bank (ECB) March meeting minutes last week shows that the debate on slowing rate hikes has also begun. We do not doubt that the ECB will decide to raise its key rate by 50 basis points in less than two weeks. But several members of the Governing Council seem to be opting for more measured increases afterward (around 25 basis points), precisely to avoid creating too much turmoil in terms of financial stability. Looking at the latest inflation data in the Union, it is certainly premature to slow down rate hikes. Underlying inflation is still too high. Unless it is considered that at this stage of the cycle, ensuring financial stability (in other words, avoiding a new banking accident) is more important than further reducing inflation. What can be gleaned from the last fifteen years is that a central bank is not able to pursue multiple objectives simultaneously. Trade-offs must be made. Today, it seems obvious that globally, the primary goal is to prevent a financial crisis from occurring (hence the need to halt or not significantly increase the cost of capital in the future). Technical point In the foreign exchange market, the EUR/USD is in a consolidation phase (down 1.28% over the last five sessions). We are facing a technical market, with profit-taking and a short-term downward trend. Based on technical analysis, it's not improbable that the EUR/USD will hit a low around 1.0865 in the coming sessions. In the long term, the rate differential across the Atlantic should nonetheless benefit the euro. Regarding EUR/CHF, the underlying trend has remained unchanged since the beginning of the year. The decline prevails (down 1.13% over the last five sessions and about 1% since the beginning of the year). The long-term target is still set at 0.95 (monthly resistance). The playground for EUR/JPY is unchanged as well. Despite consolidation last week, the euro still has upward potential in the medium term as long as Japanese monetary policy remains as is. Announcements to follow Barring any last-minute surprises, macroeconomics will not be driving the foreign exchange market this week. For example, the German business climate index is not considered a market mover. At most, it might move EUR/USD by 10-15 pips. We'll take a glance at the release of the US GDP for the first quarter. It should confirm that the US economy is slowing (growth rate of 2% compared to the previous quarter) but that a recession is still far off. Many analysts have pointed out that the troubles of American regional banks will induce a strong credit restriction that could hasten the US economy. This is not certain. In the 1980s, the US experienced similar banking troubles with savings and loans institutions, which did not cause a recession. The worst is never certain.