It's Worrying

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The macro point

The foreign exchange market reacted little to the eurozone inflation figures. It believes that the European Central Bank (ECB) will have no choice but to tighten its monetary policy until it reaches a rate of 4%. However, it does not anticipate that this may not be enough. Inflation is clearly widespread across all sectors of the economy. It will be difficult to combat. The ECB may have to go beyond expectations, which could lead to a return of volatility in the FX market. Last week was not marked by many statistics, but those that were published were rather poor. Inflation shows absolutely no signs of significant slowing in the eurozone. Core inflation (which is the most important to monitor as it indicates whether inflation is sustainable or not) reached 5.6% year-on-year in February. This is significantly more than the consensus (5.3%). The rise is explained by a surge in food products (6.8%) and services (4.8%). These are, indeed, new highs. Conversely, energy continues to decline (there has to be one piece of good news). Everything now indicates that inflation is widespread across all segments of the economy. It is high and should remain sustainably close to current levels. However, there is still no price-wage spiral. From an inflation dynamics point of view, this is positive (as it complicates the task of reducing inflationary pressures). From a purchasing power point of view, it's dramatic. If the trend continues, it is likely that we will witness a sharp decline in the real purchasing power of European households in 2023. All European countries are facing the same situation. In Germany, France, and Spain, the February figures came in above expectations. In France, inflation reached 7.2% year-on-year compared to 7% expected. For a long time, we were one of the two European countries with the lowest inflation levels (with Malta). This is no longer the case. Inflation is now higher in France than in Spain (6.1% in February). In the French case, the situation could worsen in the short term. Opinion surveys conducted among service sector business leaders show that a majority of them plan to increase prices. The problem is that services represent nearly 50% of the basket used to calculate inflation. Added to this is the surge in food products. Negotiations between distributors and suppliers will fuel the rise in basic product prices. It will become increasingly complicated. Let's not talk about the strike on March 7, which could be extended. The economic context is rapidly deteriorating in France. From a monetary policy perspective, the recent eurozone inflation figures force the European Central Bank (ECB) to be firm. The foreign exchange market anticipates a 50 basis point rate hike in March (this is already factored into forex prices). But it predicts that the cycle of monetary tightening will continue in the short term with another rate hike of similar magnitude in May (there is no monetary policy meeting in April), followed by a 25 basis point hike next June. The terminal rate (which marks the end of the tightening process) is now set close to 4%. We could go beyond that, depending on the evolution of inflation. At this stage, it must be acknowledged that forecasting inflation involves an abnormally high margin of error. No one really knows what level it will be at in three months (not even the cohort of ECB economists). This is what the head of the conjuncture department of INSEE admitted at the end of 2022 during an intervention on BFM Business. Across the Atlantic, the currency market also factors in the possibility that the fight against inflation may be longer than expected. Nomura (a bank of Japanese origin) is the first major financial institution to raise its rate hike forecast for the Federal Reserve (Fed) in March. Until now, 90% of market participants have predicted a 25 basis point increase. Nomura mentions a 50 basis point hike. This is not our scenario. But it must be acknowledged that it is conceivable, especially if the Fed wants to strike hard and show its determination to bring inflation back to its 2% target. To be completely transparent, there is significant uncertainty regarding the trajectory of monetary policy in the coming months (especially about the extent of rate hikes). This should logically lead to a resurgence of volatility in forex pairs (at the beginning of the year, volatility was rather contained in many currencies).

Technical point

In the foreign exchange market, trends remain unchanged. EUR/GBP continues to hover around the 0.87-0.89 zone. The pound sterling still shows impressive resilience, despite the economic context across the Channel. The EUR/JPY pair continues its surge and will likely soon approach 146 now that the market understands that a monetary policy turnaround in Japan will not occur (the central bank reiterated last week its commitment to maintain its ultra-accommodative stance). On the EUR/CHF side, there is little movement. The pair remains close to parity but seems unable to establish itself above it sustainably. This shows the strength of the CHF (which is partly the result of regular interventions by the Swiss National Bank in the currency market). Finally, EUR/USD shows a slight positive weekly variation (+0.60%). We remain long-term bullish. But we recognize that the pair lacks short-term catalysts to move beyond the 1.07 zone. The supports and resistances displayed below indicate the low and high points within which the rates should move during the week.

	Weekly Supports		Weekly Resistances
	S2	S1	R1	R2
EUR/USD	1.0454	1.0535	1.0771	1.0930
EUR/GBP	0.8553	0.8696	0.8921	0.8976
EUR/CHF	0.9711	0.9846	1.0041	1.0106
EUR/CAD	1.4201	1.4311	1.4534	1.4643
EUR/JPY	143.54	143.73	146.66	148.66

Announcements to follow

The main focus this week is U.S. employment. The consensus among analysts predicts a return to normal in terms of job creation (the spectacular increase in January was an anomaly). We doubt that the expected figures will cause much turmoil in the foreign exchange market. For now, the labor market is resilient. Therefore, it is not a data point that the Fed is closely monitoring to adjust its monetary policy. The number one problem remains inflation. This will likely be the case for many more months. Note that the Bank of Canada (BoC) is meeting this Wednesday. No monetary policy change is expected (the status quo prevails after eight consecutive rate hikes). Below are the publications and events expected to have a major impact on currency rates.

Day	Time	Country	Indicator	What to expect?
08/03/2023	16:00	USA	ADP Nonfarm Employment Change (February)	The consensus among analysts predicts 168,000 new jobs compared to 106,000 the previous month.
08/03/2023	16:00	CAN	Central Bank Meeting	No monetary policy change.
10/03/2023	14:30	USA	Department of Labor Employment Report (February)	A significant slowdown in job creation is expected (from 517,000 to 200,000 within a month). The unemployment rate could marginally increase (3.5%).