It's Not So Bad After All

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The macro point

The current strength of the euro, especially against the U.S. dollar, leaves us perplexed. It does not reflect renewed confidence in the European economy but rather a generalized drop in the dollar, which is largely exaggerated as it is based on the expectation that the U.S. Federal Reserve will cut its rates as early as the second quarter of next year. Yet, this is not the message conveyed by FOMC members, who advocate for high rates over a long period. Therefore, in our view, EUR pairs, especially EUR/USD, are not immune to a correction in the coming weeks. In many ways, the current period reminds us of the 'defeat of reason' that Stefan Zweig referred to, in reference to the rise of anti-Semitism and the fracturing of Western societies in the 1930s. Political and geopolitical tensions are rising. Next year will be particularly marked by an accumulation of electoral deadlines around the world, especially in the United States. Although uncertainty is high, not everything is bleak. There are many reasons to be optimistic. The economy is ultimately rather resilient. In the third quarter, U.S. GDP increased by 5.2% (second estimate published last week). This is not entirely surprising with a public deficit reaching 7% of GDP. Nevertheless, it remains an excellent performance. The American consumer holds up. Ultimately, the sensitivity of consumer demand to interest rates is weaker than expected. Added to this is the surplus savings related to Covid, which has served as a safety net for many American households to cope with inflation. Of the $2,100 billion in savings, approximately $80 billion remains. It's little. But it should allow consumption to hold for at least two more quarters. Real estate is also holding up. It was presented by consensus as the weak link in the American economy. Wrongly. The Federal Housing Finance Agency's house price index saw its thirteenth consecutive month of rise in September, with an increase of 6.1% over one year (figure published last week). However, this rise does not reflect true market dynamism but rather a shortage phenomenon. And with shortages come price increases. There is little supply due to a decade of insufficient construction and low mobility of owners who do not want to sell under current conditions. Indeed, 90% of mortgages are at rates below 3.5%. Logically, they do not want to take out a loan at a higher rate for a new purchase. There is, however, one segment where transactions are progressing: new home sales. It is an exception. However, the real pleasant surprise for the U.S. economy this year might be investment. It is talked about quite little, however. Orders for equipment goods excluding defense and aeronautics are at a level 17.5% higher than pre-Covid. This is an important statistic because it is considered a reliable barometer of business investment projects. As you have understood, despite a degraded global macroeconomic context, American business investment should hold next year. In view of these resilience factors, it is hard to see what could lead the American economy into a recession. The market consensus has also adjusted its forecasts. Apart from a few banking establishments (such as JPMorgan), all now anticipate a smooth landing of the American economy—a soft landing. In the eurozone, growth is not as flamboyant as in the United States. But we come from a long way. Recall that a little less than a year ago, many economists feared that a new energy crisis would occur at the end of 2023. That is not the case. Europe faced its first wave of winter cold last week without this leading to a rise in natural gas prices. On the contrary, they have even fallen. This is explained by a record gas stock level at 97.7%. Growth is reconnecting with its pre-crisis level, that is to say, between 1% and 2%. The disinflation process continues. Some eurozone countries are even experiencing a price drop, such as Belgium (-1.7% over one year) and the Netherlands (-1%). In France, the official GDP growth target of 1% should be reached this year if the inflation decline is confirmed and activity reaches a pace of 0.4% in the last quarter. It's doable.

Technical point

In the foreign exchange market, we consider the current strength of the euro against the US dollar an anomaly. The fact that the euro is so high is explained not by renewed confidence in the European economy but by a generalized decline in the dollar due to expectations of rate cuts by the US Federal Reserve (Fed). In our opinion, at least three factors urge caution regarding the current level of the single European currency: 1) the euro is overvalued in relation to economic fundamentals; 2) the market anticipates a first rate cut by the Fed in the second quarter of 2024, which is not at all certain. It could occur later, potentially even after the European Central Bank and 3) the widening yield differentials in the European bond market, particularly between Germany and Italy, urge caution. Therefore, we consider that the euro is not immune to a correction in the days and weeks to come given that a large part of the rise in recent weeks is not based on anything solid. The supports and resistances displayed below indicate the low and high points within which the prices should move during the week.

	Weekly Supports		Weekly Resistances
	S2	S1	R1	R2
EUR/USD	1.0699	1.0790	1.0990	1.1050
EUR/GBP	0.8444	0.8511	0.8715	0.8835
EUR/CHF	0.9399	0.9437	0.9644	0.9699
EUR/CAD	1.4398	1.4512	1.4799	1.4855
EUR/JPY	157.50	158.99	161.55	162.11

Announcements to follow

We have a new significant US statistic this week: November employment. In recent months, job creations have surprised on the upside mainly due to positive dynamics in education, health, leisure, and the public sector. We'll need to see if this positive trend continues. In any case, it is unlikely to lead to a change in monetary policy from the Fed. The terminal rate has already been reached. Below you will find the publications and events that should have a major impact on the evolution of exchange rates.

Day	Time	Country	Indicator	What to expect?
12/05/2023	16:00	USA	ISM Non-Manufacturing Index (November)	Previous at 51.8 (expanding).
12/06/2023	14:15	USA	ADP Non-Farm Employment Change (November)	Previous at 113k. Note, it's a poor leading indicator for the NFP report.
12/06/2023	16:00	CAN	Central Bank Meeting	High probability the central bank will not change its key rates (currently at 5.00%).
12/08/2023	14:30	USA	NFP Employment Report (November)	It's the traditional early month event. The consensus expects a stable unemployment rate at 4.00%.