It Won't Be Easy

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The macro point

Central banks continue to dominate the landscape. Early last week, during her hearing before the European Parliament in Strasbourg, the President of the European Central Bank (ECB), Christine Lagarde, confirmed that an anti-fragmentation mechanism would be unveiled soon. Since the central bank announced its intention to tighten monetary policy to combat persistent inflation, the borrowing costs for eurozone countries have consistently increased. This is partly due to a normalization (the period of negative rates that lasted almost ten years is an anomaly in economic history). It also reflects real concerns about financial stability for certain countries (such as Italy). This mechanism could be presented at the next ECB meeting on July 21 and aims to limit the borrowing cost gap between countries considered safe (Germany, in particular) and more vulnerable countries (especially Italy, but Greece and Spain are also affected). Other members of the Governing Council have also been providing follow-up support for this mechanism in recent days (for example, Olli Rehn, head of Finland’s central bank). Unlike 2021, when the ECB was a bit slow to react, it is taking the lead this time to ensure that a sovereign debt crisis in the eurozone does not disrupt the fragile post-Covid recovery. At Mondial Change, we are confident that this new tool will be effective in containing panic risks in the sovereign bond market.

Across the Atlantic, the President of the U.S. Federal Reserve (Fed), Jerome Powell, acknowledged during his hearing before Congress that the inflation peak has certainly not yet been reached (this was a topic in trading rooms in recent weeks). He added that the U.S. economy is sufficiently "strong and well-positioned to face monetary tightening." Some FOMC members (the body that manages U.S. interest rate policy) advocate for a very aggressive approach (such as the President of the St. Louis Federal Reserve, James B. Bullard, for example). But weak signals are accumulating, raising concerns that the economy may not be in as good a position, which could limit the central bank's room to maneuver in raising rates. Indicators published over the last two weeks show a significant decline in the real estate sector in May (latest available statistics). Three main factors explain this: rising mortgage rates (the benchmark 30-year fixed rate is now above 6%), soaring property prices, and the declining purchasing power of American households due to inflation. It is often said that real estate is one of the essential engines of the economic and business cycle in the United States. This is true. If the slowdown in the sector continues in the coming months (which is likely), one should expect very low GDP growth in the third quarter. The risk of recession is not immediate. For now, the latest survey of professional forecasters for the U.S. shows a 20% probability of recession. But the risk that this will occur at the end of 2022 or in 2023 is increasing. In the event of a recession in the U.S., the U.S. dollar will undoubtedly be the big winner according to us (due to its status as a safe haven and because surpluses from other countries tend to flow into the U.S. during a crisis, which supports the exchange rate of the greenback). We will know in a few months.

Finally, the process of monetary tightening continues around the rest of the world. Last week, it was Norway's central bank's turn to surprise the market by deciding on a 50-basis point increase in its key rate while it had previously communicated on an increase of only 25 basis points. In the face of inflation becoming uncontrollable, central banks have no choice but to act more aggressively and quickly. We think many central banks may decide to intervene urgently before their next meeting in order to send a clear message to the market (there is a strong probability that the Bank of England will announce at least a 25-basis point rate hike, urgently, before its next meeting scheduled for August 4). In the foreign exchange market, the weak yen is increasingly problematic for the Japanese authorities. Since the beginning of the year, the Japanese currency has decreased by 8.50% against the euro and 17% against the U.S. dollar. This is significant. In an interview with Bloomberg last week, Takehiko Nakao, former head of foreign exchange at Japan's Ministry of Finance, indicated that direct intervention on FX by the Bank of Japan (BoJ) cannot be excluded. This rumor has been circulating among traders for several weeks. The depreciation of the Japanese currency is unanimously perceived as negative because it contributes to rising imported inflation. Moreover, the current level of the yen (around 134 against the dollar and around 142 against the euro) does not appear to be supportive for export companies (at this level, the positive effect aimed at boosting exports is weak). It is likely that an intervention in the Forex market will occur in the coming months. But we doubt it will be successful. In the current context, only an increase in the key interest rate (which is not on the table at the moment) could sustainably support the currency of the archipelago. As for EUR/USD, the pair traded for most of last week around the pivot zone of 1.05. Technical analysis confirms the medium-term bearish bias (there are no macroeconomic factors supporting the euro either). Our target is around 1.02-1.03. This price zone could be reached as early as this summer.

The supports and resistances shown below indicate respectively the low and high points within which the prices should evolve during the week.

	SUPPORTS	WEEKLY	RESISTANCES	WEEKLY
	S2	S1	R1	R2
EUR/USD	1.0239	1.0401	1.0811	1.0990
EUR/GBP	0.8330	0.8420	0.8627	0.8670
EUR/CHF	0.9830	0.9989	1.0284	1.0432
EUR/CAD	1.3334	1.3419	1.3785	1.3900
EUR/JPY	139.18	140.93	143.76	145.66

This week will be relatively calm in terms of statistics. The second estimate of U.S. GDP in the first quarter should not diverge from the first reading. The foreign exchange market will pay it no attention. It is evident that American consumer confidence (Conference Board estimate published Tuesday for the month of June) will continue to decline in the coming months. We think that Americans will consume without restraint during the summer (this is the first summer without Covid since summer 2019!). But come September, they should be more cautious about their spending. The worst is yet to come concerning the U.S. economy.

Below you will find the publications and events that should have a major impact on currency price developments.

DAY	TIME	INDICATOR	WHAT TO EXPECT?
28/06	16:00	Conference Board Consumer Confidence (June)	Another decline expected to 104 from 106.4 in May. Inflation is wreaking havoc.
29/06	14:30	Quarterly GDP Q1	In the first estimate, GDP came out in negative territory. This should be confirmed again.
30/06	09:55	Unemployment rate change (June)	A further decline expected to -15k from -4k in May.