Monetary Chaos

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The macro point

Last week was busy and challenging. Central banks continued to tighten their monetary policy. The rate hikes were significant: +50 basis points in the United Kingdom, +75 basis points in the United States and Switzerland (Swiss monetary policy usually follows the eurozone), and +100 basis points in Sweden (this was a surprise but did not support the Swedish krona in the currency market). Central banks have no choice but to act in this way to try to curb inflation spreading across all sectors of the economy. The combination of less accommodative financial conditions (linked to the increase in key interest rates), inflation causing widespread impoverishment, and various challenges disrupting supply chains (strikes at UK ports, congestion at California ports, and China's zero-Covid policy) contribute to a significant deterioration in economic conditions.
A few days ago, the Bank of England (BoE) acknowledged that the UK is likely already in recession. This is not a surprise given the collapse in retail sales in August (worse monthly performance than during the global financial crisis of 2007-09). It is the first major developed economy to be in this state. This explains why the increase in the key interest rate was slightly less than anticipated by foreign exchange market analysts (50 basis points instead of 75 basis points). Other countries may face the same fate: Germany and France as early as the fourth quarter of this year, possibly the United States in 2023 (but this is not currently the main scenario of the US Federal Reserve). Inflation continues to rise as well. It is reaching levels that are increasingly unsustainable. The producer price index (PPI) in Germany in August was a real shock. It jumped by 7.9% month-over-month (while the consensus expected an increase of only 2.4%), bringing the PPI to a record level since the end of World War II at 45.8% year-over-year. It's huge. A year ago, no one could have imagined such an inflationary spike. When looking in detail, it's worse. Energy price increases reach 139% year-over-year. Unsurprisingly, many businesses are unable to keep up. Additionally, inflation is now spreading across all segments, both intermediate goods (wood, textiles, rubber) and non-durable consumer goods (cleaning products or office supplies). The situation is not expected to improve immediately. The peak of inflation is clearly ahead of us in Europe (while it is likely surpassed in the United States). In the best-case scenario, inflation in the eurozone should peak only in the first quarter of next year and then slowly decrease.
In this context, the "whatever it takes" approach is likely to persist. It is certainly necessary to prevent cascading business bankruptcies. Like during the Covid era, states are trying their best to protect their economies. According to data compiled by the Brussels-based think tank Bruegel (and updated last week), the total amount unlocked by European governments to 'accommodate' households and businesses facing rising prices has reached 500 million euros since September 2021. The actual amount is higher since Bruegel does not account for recent anti-inflation packages presented by the UK and Germany. It is likely that by next year, more than a billion euros will have been spent in this context. We must also add all the measures taken to help energy sector players. This may involve granting loans, liquidity facilities, or nationalizations (as is the case in Germany). To date, this represents about 450 billion euros. To give a sense of scale, it is more than half of the European post-Covid recovery plan, called NextGenerationEU. It is likely that this is just the beginning. In the coming weeks, other European states plan to announce new aid measures. Initially, all these provisions were presented as temporary. In reality, they are becoming lasting (permanent).
In the Forex market, it's a bit of chaos. Last Friday, Agefi headlined: "The foreign exchange market is shattering." The risk of recession and the monetary tightening underway in most countries are causing renewed volatility in major currencies and a retreat to the US dollar (a phenomenon we have often commented on here). Result: Central banks are deciding to act to stop their currency's fall against the US dollar. For the first time since 1998, the Bank of Japan intervened massively to support the yen last week. The US Treasury even gave its approval in a widely commented statement in trading rooms. It acknowledged that the yen's fall was disproportionate and that Japan has the right to intervene. Expect central banks to become more interventionist in the coming months due to the fall of many currencies. Given the collapse of the British pound against the US dollar in recent sessions (-4.4% week-over-week), we would not be surprised if the BoE decides to act in turn. The euro is also falling significantly (-3.06% week-over-week). During Friday's session, the EUR/USD pair hit a 22-year low near 0.97. It is only a matter of time before the 0.96 target is reached. Unlike the BoJ, the European Central Bank is not accustomed to intervening in exchange rates. It is unlikely to use this weapon. This means there is nothing on the horizon likely to stop the euro's slide.
The supports and resistances shown below indicate the low and high points within which prices are expected to move during the week.

	SUPPORTS	WEEKLY	RESISTANCES	WEEKLY
	S2	S1	R1	R2
EUR/USD	0.9474	0.9600	0.9944	1.0171
EUR/GBP	0.8614	0.8759	0.9056	0.9276
EUR/CHF	0.9064	0.9313	0.9817	1.0060
EUR/CAD	1.2884	1.3058	1.3404	1.3578
EUR/JPY	135.27	137.18	142.52	145.95

Unlike last week, there are few major announcements expected on the economic agenda. The IFO business climate index in Germany is expected to fall again – reflecting recession expectations for the eurozone's largest economy. This should have little immediate impact on the euro's exchange rate. Finally, the US consumer confidence index (published by the Conference Board) is expected to be almost stable in September. This is good news if confirmed. Despite the high level of inflation (8.3% in August year-over-year), US consumers are showing incredible resilience. This could allow the US economy to narrowly avoid recession.
Below are the publications and events expected to have a major impact on currency rates.

DAY	TIME	INDICATOR	WHAT TO EXPECT?
09/26	10:00	IFO – Business Climate (September)	Further decline expected to 86.8 from 88.5 in August.
09/27	16:00	Conference Board Consumer Confidence (September)	Economists' consensus expects near stability at 103.0 in September from 103.2 in August.
09/30	11:00	Consumer Price Index (September)	Final estimate (consensus at 9.1% year-over-year). The final publication is usually a non-event for the forex market.