Pivot

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The macro point

Pivot: an intransitive verb meaning to turn or swing around an axis, around a fixed point. For months you've heard about the inflation peak. Now, you'll have to get used to hearing about the pivot in monetary policy. Concretely, this means that central banks, which have so far been obsessed with inflationary risks, are beginning to consider the risks to growth related to the rise in interest rates. This may encourage them to slow the pace of rate increases, pause, or even lower rates in the longer term. This is precisely what's happening. A few weeks ago, the Australian central bank was the first to pivot. It slowed its rate hikes to 25 basis points (while the new norm is 50 basis points or even 75 basis points). The reason: rate hikes could trigger the bursting of the Australian housing bubble. For a while, many foreign exchange market analysts thought it was an isolated case. Last week proved them wrong. Not one, but two major central banks pivoted. To everyone’s surprise, the Bank of Canada (BoC) raised its key rate by only 50 basis points, while consensus expected a 75-point increase (which made sense given the surge in prices). But the BoC decided that too large a hike might push Canada into recession. The Central Bank of Mexico also opted for a change in monetary policy last week, indicating it had likely reached the peak of the cycle in terms of key rates. Others will certainly follow. The foreign exchange market is already rife with rumors about a possible pivot from the U.S. Federal Reserve (Fed). In the short term, this is unlikely. The European Central Bank (ECB) is also not inclined to slow the pace of rate increases for now. During last week’s meeting, it raised its key rate as expected by 75 basis points. There was almost no surprise. The discussion on reducing the balance sheet is postponed to later (probably December) while commercial banks are heavily encouraged to repay low-interest loans they took under very long-term refinancing operations. The ECB refrained from providing specific guidance on the next steps in monetary policy. However, analysts expect a slowdown in rate hikes from next December (a 50 basis point hike is expected by the market). This is not entirely certain. The eurozone economy seems a bit more resilient than expected while inflation continues to be at very problematic levels in some countries (10.4% annual change in Germany, for example). It is likely that the scale of the December rate hike in the euro area will depend closely on upcoming indicators. In any case, the euro did not really benefit from the ECB’s announcement. Following Christine Lagarde's press conference, the institution's president, the EUR/USD pair collapsed. This is also explained by the release of U.S. GDP in the third quarter at almost the same time. GDP came in better than expected at 2.6%. It’s an excellent performance that confirms what we've been saying for months, namely that the U.S. economy is not yet on the brink of recession. Across the Channel, a new Prime Minister has taken office for a week now. Boris Johnson’s former Chancellor of the Exchequer, Rishi Sunak, took over from the short-lived Liz Truss. It is still difficult to know if he will have real room to maneuver in dealing with the deep crisis the UK is facing. He is set to present his 2023 budget project on November 17th. As a reminder, it was Truss’s mini-budget presented last September that caused the sterling to plummet for several weeks. It is therefore likely that the date of November 17 will be important once again for the British currency. We will talk to you about it again. On the foreign exchange market, the euro ended last week in the green against all its main counterparts (excluding the British pound, which benefits from a technical rebound). Traders repositioned on buying the European currency but this mainly reflects a technical rebound. It is by no means a signal of a lasting return of confidence in the eurozone. Our medium-term strategy on the EUR/USD remains unchanged. We still expect a continued decline. The two main support levels to watch are at 0.9800 and 0.9663. The technical rebound of the British pound is strong (+1% weekly change against the euro). It is unlikely to last from our point of view. Foreign investors are still very concerned about the UK situation. We doubt the new Prime Minister can durably restore confidence. Above all, the recession is certainly just beginning. It will be long and deep if we believe the Bank of England. We remain bullish on the EUR/GBP consequently. The supports and resistances displayed below indicate respectively the low and high points within which the rates should evolve during the week.

	SUPPORTS	WEEKLY	RESISTANCES	WEEKLY
	S2	S1	R1	R2
EUR/USD	0.9663	0.9800	1.0145	1.023
EUR/GBP	0.8341	0.8501	0.8817	0.8979
EUR/CHF	0.9624	0.9759	1.0165	1.0200
EUR/CAD	1.3023	1.3289	1.3820	1.4085
EUR/JPY	142.00	144.37	149.40	150.07

Will the Fed and the Bank of England (BoE) pivot this week following the BoC’s example? It's unlikely. Both central banks are expected to jointly announce a continued increase in rates with an expected rise of 75 basis points in both cases. Inflation continues to be volatile even if it decreases in the United States. In the UK, it’s worse as it continues to rise. In both cases, it will certainly be necessary to raise real rates (accounting for inflation) much higher to hope for a lasting decline in inflation. We do not believe, in the current state of things, that a pivot is appropriate for these two economies. Finally, there will be, as usual at the beginning of the month, the indicators on the labor market in the United States (ADP survey and the Department of Labor Employment Report). These are lagging indicators with respect to the economic cycle, so with a low impact on the currency market. Below you will find the publications and events expected to have a major impact on the exchange rate movements.

DAY	TIME	INDICATOR	EXPECTATION?
01/11	16:00	ISM Manufacturing PMI (October)	The U.S. economy is holding up, unlike the eurozone. Consensus forecasts a figure of 50.4 in October.
02/11	14:15	Non-farm ADP Employment Change (October)	Previous at 208k.
	20:00	Central Bank Meeting	75 basis point policy rate hike. Subsequently, the rate reduction amplitude might be revised downwards.
	20:30	J. Powell Press Conference	This traditionally marks a high volatility moment on currencies.
03/11	14:00	Central Bank Meeting	Consensus at 3% vs. 2.25% previously.
	16:00	ISM Non-Manufacturing PMI (October)	Analysts' consensus at 56.0 against 56.7 in September.
04/11	14:30	Department of Labor Employment Report (October)	Unemployment rate rising to 3.6% of the labor force and job creation at 200k against 263k in September (subject to revision).