It's Looking Bad

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The macro point

We would have preferred to bring you good news, that economic growth is strengthening, that inflation is declining, and that the war in Ukraine will have only marginal consequences on the European economy, but that will not be the case. Statistics published last week in the United States and Europe confirmed that growth has certainly slowed since the beginning of the year more than anticipated. Two main factors explain this: the war led by Russia and inflationary pressures that have been present since 2021 and continue to intensify. Last week, we informed you that INSEE anticipates a rebound in inflation in France to 4.3% annual variation in March compared to 3.6% in February. This was partly confirmed by business surveys published by Markit (PMI purchasing managers' survey) and by INSEE for France. In both cases, companies indicated that they expect inflationary pressures at the input level (particularly raw materials) to substantially strengthen in the coming months. Some companies can pass these increases on to consumers if they have pricing power. But not all are in this situation. Many SMEs and ETIs will have no choice but to cut their margins and reduce costs as much as possible. The economic outlook for 2022 is much more pessimistic than expected. Economic growth is slowing. Inflation is eroding household purchasing power, which hurts consumption. Added to this is the geopolitical risk (Ukraine/Russia and China/Taiwan), which also creates many disruptions. No economic zone is spared. Last week, the Office for Budget Responsibility (part of the UK Treasury responsible for independently auditing UK public finances) drastically revised down its GDP growth forecast for 2022. It is expected to be only 3.8% compared to an initial estimate of 6% published last October. In 2023, the UK economic landing is expected to be brutal, with growth of only 1.8% (close to its pre-pandemic levels). Simultaneously, inflation is expected to reach an average of 7.4% this year with a peak anticipated at 8% before the summer. What is most unsettling is that these forecasts are considered quite optimistic by many analysts and economists. We are not immune to a more significant deterioration of the situation. Central banks are in a complicated situation. For many of them, they will have to choose between fighting inflation or supporting growth. The Swiss National Bank (SNB) kept its key rate in negative territory, unchanged at -0.75%, last Thursday, as expected. However, it indicated it is ready to move out of its inertia to combat inflationary pressures that are increasing in the Confederation but remain comparatively low. The SNB forecasts inflation at 2.1% this year. By comparison, the ECB forecasts inflation at 5.1% over the same period in the eurozone. It is therefore likely that by the end of the year the SNB will decide to raise its key rate, certainly slightly. Several emerging countries have tightened their monetary policy over the past week. The Mexican central bank raised its key rate by 50 basis points, to 6.5%, leading to an increase in the Mexican peso. The South African central bank was less aggressive with an increase in its key rate of only 25 basis points to 4.25%. In both cases, this is only the beginning. Further rate hikes will occur shortly. The objective is often twofold: to fight against inflation and also to support the local currency (with more or less success, depending on the case). On the foreign exchange market, the euro is still in a consolidation phase against the U.S. dollar. We do not anticipate major changes in the coming sessions. Just keep an eye on the levels shown in the table below. Technical indicators confirm that the trend is still negative in the medium term, as long as the pair has not crossed its 200-day moving average located at 1.1505. This is obviously a very distant target. The EUR/GBP is also in a consolidation phase. Compared to last week, support and resistance levels have hardly changed. However, there was movement in the EUR/JPY favoring a decrease in risk aversion on the foreign exchange market. The pair gained almost 1.70% in one week. Profit-taking could occur in the short term.The supports and resistances shown below respectively indicate the lower and upper points within which the prices should evolve during the week.

	SUPPORTS	WEEKLY	RESISTANCES	WEEKLY
	S2	S1	R1	R2
EUR/USD	1.0745	1.0903	1.1123	1.1232
EUR/GBP	0.8232	0.8289	0.8474	0.8594
EUR/CHF	0.9996	1.0219	1.0376	1.0505
EUR/CAD	1.3320	1.3446	1.3906	1.4002
EUR/JPY	130.14	132.27	136.87	140.23

This week, the war in Ukraine will still be a topic of interest for traders. However, it should not have significant repercussions on exchange rates immediately. On the ground, the conflict seems to be stalling and no perspective for a high-end exit (via a diplomatic agreement) is on the horizon. From a statistical point of view, U.S. employment in March (ADP survey and especially the Labor Department's employment report) will be monitored. The first estimate of inflation in the eurozone in March will be the highlight of the week. The consumer price index is expected to rebound sharply, to 6.2% annual variation compared to 5.9% in February. This is likely to complicate the European Central Bank's task and force the institution to normalize its monetary policy more quickly.Below you will find publications and events that should have a major impact on currency price developments.

DAY	HOUR	INDICATOR	WHAT TO EXPECT?
29/03	15:00	Conference Board Consumer Confidence (March)	Expected decline to 106.6 from 110.5 the previous month.
30/03	13:15	ADP Nonfarm Employment Change (March)	The consensus anticipates a decline to 388k from 475k last February.
31/03	13:30	Core PCE – Fed's preferred measure of inflation (February)	The consensus is at 5.1% annual variation compared to 5.2% in January.
01/04	13:30	U.S. Employment Report (March)	The unemployment rate is expected to decline again, to 3.7%. Job creation should slow to 400k from 678k in February.