Ouch

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The macro point

Inflation did not take a vacation in July and August. In a preliminary estimate, the consumer price index (CPI) in the eurozone reached a new record, at 9.1% year-on-year in August compared to 8.9% in July (consensus at 9%). It is a painful reminder at the start of the new term that inflation is here to stay. As aptly noted by Alexandre Bompard, CEO of Carrefour, at the Medef REF 2022: "Let's stop the endless debates about the inflation peak date. Inflation is here, it is persistent, there will be no return to normal tomorrow." That's been said. In detail, not all countries are in the same situation. Inflation continues to grow at a sustained pace in Germany. The latest CPI figure came out at 7.9% year-on-year (compared to 7.5% expected). The Bundesbank, the German central bank, expects inflation to likely reach 10% in the coming months. The main driver of the increase remains the same: energy. Energy prices (gas and electricity) reached record levels over the summer in wholesale markets. The one-year forward contract for electricity in Germany reached the stratospheric level of 900 euros per megawatt-hour. It was unimaginable two years ago. A price close to 75 euros per megawatt-hour was already considered very high. We have entered a new world. In France and Spain, inflation has eased slightly according to the latest figures. In France, it reached 5.8% year-on-year in August compared to 6.1% the previous month. In Spain, it registered at 10.4% over the same period compared to 10.8% in July. It remains painfully high, however. All economic players (households, government, and businesses) have understood that they will need to adapt to this new reality. All the companies we have spoken with over the past few weeks are revising their hiring and investment outlooks downwards. However, the French situation is rather good compared to other European countries (consumption is holding up, business failures remain abnormally low, growth is rather solid, etc.). On the other hand, we do not see how British companies will be able to withstand it. During August, Citigroup and Goldman Sachs drastically revised their inflation outlook for the UK. The CPI is expected to reach an outrageous level of 20% year-on-year in 2023 if energy prices remain high (which is likely). We do not see how a SME can adapt to such a degraded economic environment without massive public aid (which is not on the table at the moment across the Channel). It will be an economic hemorrhage. The CPI is already at a painful level (10.1% year-on-year in July!). From our point of view, we will not escape the continuation of "whatever it takes" (perhaps with a little more targeting). According to data published by the renowned Brussels think tank Bruegel, France has already spent nearly 44 billion euros since September 2021 to help households and businesses cope with the skyrocketing energy bill (equivalent to half of the annual national education budget). And the year is not over. It is likely that we will reach an amount close to 70-80 billion euros for 2022. Only Germany has done more (66 billion euros). The tariff shield is the main measure implemented in France. It has cost 20 billion euros so far. But it does not target businesses. Bercy will certainly need to think about a support mechanism for entrepreneurs. Talking about energy sobriety is essential (how to reduce your energy bill by lowering the average temperature in premises for example). But it will be necessary to go a little further to ensure that micro and small businesses do not suffer due to the adverse conditions in the energy market. Volatility is back in the foreign exchange market. That's for sure. It is an additional risk factor for companies exposed to this issue (either through imports or exports). Hence the need to adopt an appropriate currency hedge. It is an essential preventative measure to avoid unpleasant surprises. Our view of the market has not changed since our last newsletter at the end of July. We are convinced that the numerous risks facing the eurozone in the short term will lead to a prolonged depreciation of the euro against its major counterparts. We are right for now. The euro has fallen sharply over three months: -6.80% against the US dollar, -5.84% against the Swiss franc, and -2.48% against the Canadian dollar. Over the summer, the euro reached a new low against the dollar, at 0.9926. The EUR/USD pair now seems firmly anchored below parity. There may be technical rebounds (as was the case mid last week). But they are not meant to last. Our short-term target is at 0.9816 (which is quite achievable in the coming weeks). There is an exception: the EUR/GBP. The euro has benefited in recent sessions from concerns about the UK's inflation (especially the upward revision of the CPI forecast by Goldman Sachs). This allowed the EUR/GBP to skyrocket above 0.8600. The selling pressure on the GBP could increase in the coming weeks due to uncertainties surrounding the British economy. Concretely, we could have a stabilization of the EUR/GBP around 0.86 (while the pair tended to fluctuate between 0.8330 and 0.8500 during the summer). The supports and resistances shown below indicate the low and high points within which the prices should evolve during the week.

	SUPPORTS	WEEKLY	RESISTANCES	WEEKLY
	S2	S1	R1	R2
EUR/USD	0.9648	0.9816	1.0153	1.0321
EUR/GBP	0.8416	0.8520	0.8708	0.8778
EUR/CHF	0.9294	0.9516	0.9866	0.9960
EUR/CAD	1.2814	1.2966	1.3395	1.3685
EUR/JPY	136.12	138.00	141.86	144.73

This week marks the return of central banks, especially the European Central Bank (ECB). Over the past ten days, almost all of the ECB's main actors (except chief economist Philip Lane) have advocated for a significant rate hike at the September 8 meeting. The foreign exchange market is betting on a 75 basis points increase (while a more moderate 50 basis points hike was still mentioned a few weeks ago). The ECB certainly has no choice. Inflation is out of control in the eurozone. It must show that it is capable of fighting it. Expectations of a significant rate hike fueled last week's midweek technical rebound of the euro (which we mentioned above). However, we doubt it will be enough to reverse the trend on the main euro pairs. One should certainly expect a lot of volatility in exchange rates on Thursday afternoon. The watchword of the week is vigilance. Below are the publications and events that should have a major impact on the evolution of currency prices.

DAY	TIME	INDICATOR	EXPECTED?
09/06	16:00	ISM Non-Manufacturing Index (August)	A further decline expected by consensus to 53.5 from 56.7 in July (figure may be revised)
09/07	16:00	Central Bank Meeting	A hike of at least 50 basis points is expected by analysts.
09/08	14:15	Central Bank Meeting.	Following comments by Isabel Schnabel (member of the ECB's Executive Board) at Jackson Hole, the foreign exchange market is betting on a 'significant' rate hike, around 75 basis points.