It's Complicated

The information presented in this publication is provided purely for informational purposes and does not constitute investment advice, a sales offer, or a solicitation to buy, and should not be used as a basis or considered as an inducement to engage in any investment.

The macro point

Fighting inflation is not easy. This is what we gather from the latest inflation figures released in the United States last week. In January, inflation (measured by the consumer price index) reached 6.4% annually. Certainly, it is the lowest level since October 2021. But analysts expected a larger drop (consensus at 6.2%). The slower-than-expected decline is explained by two main factors. Firstly, the United States has made a methodological change to measure inflation. It was anticipated. In the short term, this change tends to overestimate inflationary pressures. Secondly, it must not be denied that inflation does not recede everywhere in the same way. If we focus on the services sector and particularly on professions that require significant labor (skilled or not), everything indicates that inflationary pressures will persist. The average price increase tends to converge towards 6.5-7% annually for lawyers, dentists, hairdressers, or nurseries. It is the obvious signal that part of the inflation is not going to disappear anytime soon. This is what is called long-term inflation. In the 1970s, the United States experienced three successive peaks of inflation. For now, everything indicates that the peak is behind us (it was reached during the summer of 2022). But we know that inflation is volatile, and it only takes oil prices to return to 100 dollars (compared to less than 80 dollars nowadays) for this to result in a new surge of inflation. As we have been repeating since the end of the Covid period, it will take time (certainly years!) before returning to more tolerable levels of inflation (and we are not even talking about 2% on average over the long term but rather 3-4%). For now, most traders do not anticipate a change in US monetary policy following the inflation figure. The consensus still expects two 25 basis point rate hikes and then a monetary policy pause next summer. However, some international banks have revised their forecasts. Goldman Sachs (which generally has a good track record in predicting US monetary policy evolution) now anticipates three 25 basis point rate hikes, with a terminal rate around 5.25-5.50%. Depending on the inflation figures to be released in the coming weeks, the consensus may evolve. For now, what is certain is that the American Federal Reserve (Fed) will increase its key rate by 25 basis points next month. It has great latitude to tighten the cost of money. So far, the ongoing economic slowdown in the United States has had no impact on unemployment (which is at its lowest since 1969) and consumption despite low savings (retail sales perform surprisingly well!). It’s an unprecedented period. The prospect of a recession, which was so often mentioned at the end of last year, is now just a distant memory. Obviously, this is good news for everyone. On the European side, the situation has not changed. There was no significant statistic last week. The money market expects that the European Central Bank (ECB) will continue to raise its rates, up to a terminal rate of 3.75%. This could be reached at the end of the summer (in September), according to the Governor of the Bank of France, François Villeroy de Galhau. Again, the magnitude of the rate hike for March is not in doubt. Isabel Schnabel, a very listened member of the ECB's executive board, indicated at the end of last week that in all possible and unimaginable scenarios, the next rate hike will be 50 basis points in the eurozone. At least, that's clear. What is certain is that it has not helped the euro against the US dollar. Indeed, the European single currency continued to lose ground against the greenback (-0.10% in weekly variation). However, speculative purchases were observed during Friday's session when the EUR/USD reached the 1.0610 area. Despite the recent troubles of the pair, we are still positioned for an increase, with a target around 1.0950 (in the medium term). The euro, however, appears to be in a good position against its other counterparts (rising against the pound sterling, Canadian dollar, and Japanese yen, for example). The euro made a push of more than 2% in weekly variation against the Japanese yen. Traders are positioning themselves to buy as the possibility of normalizing Japanese monetary policy moves away again. We might see some volatility on the EUR/JPY pair this week, particularly on February 24 when the hearing of the new Governor of the Bank of Japan (BoJ) will take place before the Japanese parliament (it is a formality, he is assured to get the position). It will be an opportunity to learn a little more about the monetary policy this illustrious unknown wishes to pursue. All experts believe that at this stage he should simply follow the continuity of what has been done by the BoJ in recent years. If so, it is negative for the Japanese yen.

The supports and resistances displayed below indicate the low and high points within which the rates should evolve during the week.

	Weekly Supports		Weekly Resistances
	S2	S1	R1	R2
EUR/USD	1.0508	1.0595	1.0787	1.0888
EUR/GBP	0.8610	0.8740	0.8942	0.9009
EUR/CHF	0.9630	0.9730	0.9966	1.0034
EUR/CAD	1.4169	1.4287	1.4513	1.4690
EUR/JPY	139.90	141.24	145.76	149.80

This week, we doubt the minutes of the last Fed meeting will be of great interest. The meeting took place before the release of the latest inflation figure. However, we should keep an eye on the publication of the core PCE index for January (consensus: increase of 0.4% monthly). This is one of the inflation measures closely monitored by the Fed because it allows, even though it is published with a certain time lag, to observe more persistent inflationary pressures. It is therefore an important indicator to differentiate between cyclical inflation (which is expected to dissipate) and structural inflation (which will remain). On the German side, the figures for February should confirm that the risk of recession is moving away. But we already knew that (at least, if you take the time to read us every week).

Below you will find publications and events that should have a major impact on the evolution of currency rates.

Day	Time	Country	Indicator	What to expect?
21/02/2023	11:00	GER	ZEW Economic Sentiment Index (February)	Increase to 22.0 from 16.9 in January. The specter of recession is receding.
22/02/2023	10:00	GER	IFO Business Climate Index (February)	Increase to 91.4 from 90.2 in January. Another positive signal!
22/02/2023	20:00	USA	Minutes of the last Fed meeting	Probable confirmation that at least two more rate hikes are coming.
23/02/2023	14:30	USA	Core PCE Index (January)	Increase to 0.4% monthly from 0.3% in December.