One Word: Inflation

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The macro point

One word: inflationThe macro pointThe main theme in the foreign exchange market was inflation last week. This will also be the case this week. In the United States, the consumer price index in October caused a shockwave. The index came in at 6.2% year-on-year. This is well above the consensus (5.8%) and the September figure (5.4%). It is the highest increase observed since November 1990. Significant tensions in global supply chains and the energy crisis are the two main factors driving prices up. The U.S. Federal Reserve considers the phenomenon to be temporary. This is doubtful. It is becoming increasingly evident that high inflation will persist longer than expected, certainly for much of 2022. Moreover, a price-wage spiral seems to be starting in the U.S. in certain strained sectors, particularly in services. This will fuel the generalized rise in prices.

Europe is not immune to inflationary pressures. In Germany, inflation reached 4.5% year-on-year in October. This is in line with the consensus. Besides disruptions in supply chains and rising energy prices, the price increase in Germany is also explained by the base effect linked to the temporary reduction in VAT. It is hoped that once this phenomenon ends, inflation may decline slightly. But it should remain higher than before the pandemic. This will fuel tensions between the European Central Bank and part of the German political class, which is advocating for a normalization of monetary policy in the eurozone to counter inflation. The central bank's December meeting is going to be complicated.

In emerging countries, the normalization of monetary policy is already well underway. Inflation levels are often much higher than in developed countries. In Brazil, inflation reached 10.67% year-on-year in October according to the first estimate. This is a bit more than in September (10.25%) and the analysts’ forecast (10.45%). A little over two weeks ago, the Brazilian central bank raised its main policy rate to 7.75%. More rate hikes are to come. The monetary policy differential between emerging countries and most developed countries will favor the return of carry trade strategies in the foreign exchange market, as we mentioned a few weeks ago. These strategies, which consist of taking advantage of interest rate differentials between countries, had almost disappeared over the past decade due to the generalized decline in rates globally and the implementation of quantitative easing policies. This is a major change currently occurring.

Technical point

On the foreign exchange market, the dollar index (which measures the dollar against a representative basket of foreign currencies) is rising sharply due to inflation fears. Since the start of September, it has climbed from 92 to about 95. Everything suggests that the increase will continue in the medium term. Given the uncertainty surrounding price evolution, traders are taking refuge in safe havens, primarily the US dollar. As a result, the EUR/USD continues its slow decline. A study published last week by ING bank indicates that the euro is still overvalued against the US dollar. In one month, the depreciation reaches 0.70% - which is limited. The next target for the pair is at 1.1359. At this stage, we do not see what might cause a trend reversal. The supports and resistances displayed below respectively indicate the low and high points within which the prices are expected to evolve during the week.

	SUPPORTS	WEEKLY	RESISTANCES	WEEKLY
	S2	S1	R1	R2
EUR/USD	1.1270	1.1359	1.1670	1.1774
EUR/GBP	0.8380	0.8456	0.8631	0.8691
EUR/CHF	1.0423	1.0483	1.0634	1.0703
EUR/CAD	1.4255	1.4332	1.4612	1.4660
EUR/JPY	128.07	129.40	132.22	133.36

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Announcements to follow

New inflation figures are expected this week:

The UK consumer price index is forecast at 3.2% year-on-year in October. It will be closely watched by traders. A high figure could strengthen expectations of a rate hike by the Bank of England. Traders anticipate monetary tightening at the beginning of next year.
The eurozone consumer price index is announced at 4.1% year-on-year in October. It is well above the European Central Bank's target. But it should not trouble the institution, which continues to assert that high inflation is temporary. Developments in the coming months will allow us to verify if it is right.

It is clear that inflation will be the major theme of the currency market at the end of the year, and probably a large part of next year. Below you will find the publications and events that are expected to have a major impact on the evolution of currency prices.

DAY	TIME	INDICATOR	WHAT TO EXPECT?
16/11	14:30	Retail Sales (October)	Increase of 0.7% against 0.8% previously.
17/11	08:00	Consumer Price Index (October)	Increase to 3.2% year-on-year against 3.1% previously.
	11:00	Consumer Price Index (October)	The consensus anticipates a rise of 4.1% year-on-year – well above the ECB target.
18/11	14:30	Philadelphia Fed Manufacturing Index (November)	Slight decrease expected to 21.5 from 23.8 in October.

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