Political Risk and Monetary Risk The information presented in this publication is provided for informational purposes only and does not constitute investment advice, an offer to sell, or a solicitation to buy, and should in no way serve as a basis or be considered an incentive to engage in any investment. The macro point Political risk and monetary riskThe macro pointFirst, the good news on the economic front with the release in recent days of several statistics in Europe confirming a slight recovery in activity. In Germany, the ZEW economic sentiment index reached its highest level in four months (at 61.8 in January) while in France, the economic situation is holding up quite well despite the health context. Business climate has recently improved in most sectors, particularly in industry. Two exceptions, however: transportation and hospitality, for obvious reasons. Despite the resurgence of political risk in Europe (with the jeopardy of the Conte government in Italy and the resignation of the government in the Netherlands), no particular tension has appeared in the foreign exchange market. The fact that the European Central Bank is still there to ensure that financing conditions remain accommodative, as reminded last Thursday by Christine Lagarde, prevents any lasting rise in risk aversion.On the pandemic front, it is becoming increasingly clear that stricter measures will have to be taken in Europe, particularly to contain the English variant. However, the prospect of a negative shock on activity in the first quarter has already been priced in by the market. The bad news would be a more lasting shock than anticipated, which would harm the recovery in the second quarter. This scenario, however, has not been priced in. Everything will depend on the speed of the vaccination process, and also on the effectiveness of social distancing measures in preventing significant spread of the new variants. At this stage, no one is able to know what will happen health-wise. Therefore, caution is warranted. Technical point On the foreign exchange market, trading volumes were rather low last week, particularly related to the holiday in the United States. It should be noted that volatility remains contained at the level of exchange rates for developed countries, contrary to what is happening for emerging market exchange rates. One-month implied volatility for emerging market currencies is even above its long-term average. This largely reflects strong interventionism by central banks in emerging countries (direct intervention on exchanges in Israel, intervention by the Polish central bank to curb the zloty's rise, and significant growth in foreign exchange reserves in Asia, which is a clear sign of interventionism by authorities). On the side of developed countries, as central banks are in autopilot mode, at least until the end of the second quarter, volatility is lower.The flagship pair of the forex market, EUR/USD, shows a positive performance on a weekly basis. In the short term, it is likely that consolidation will continue, after reaching its peak at 1.2355 a few weeks ago. If we look at traders' positioning, we observe several similarities with early 2018. At that time, the EUR had also seen a significant rise against the US dollar, approaching levels reached in early January this year, before falling by nearly 10% over the rest of 2018. This does not mean that the same pattern will repeat in 2021, but it does call for caution regarding the outlook for the pair's development. Hence the importance of having good currency hedging.As for the EUR/GBP pair, there has been some movement. The British pound hit an eight-month high against the euro, with the pair reaching 0.8833, before losing ground. This is the fourth time the pair has hit resistance in the zone between 0.8830-8865. Nothing to expect in the short term regarding monetary policy. Like the European Central Bank, the Bank of England is not expected to alter its monetary policy at its meeting scheduled for February 4th. The £150 billion package deployed for 2021 should be sufficient to meet its objectives.A final word concerning the EUR/CAD which experienced positive performance on a weekly basis. The pair, however, reacted little to the Bank of Canada's monetary policy meeting, which strived to keep rates unchanged at 0.25% and continue the asset purchase program at 4 billion CAD per week. However, there is a wind of optimism on the part of the central bank regarding the return to economic normalcy thanks to the vaccination program.The supports and resistances displayed below indicate respectively the low and high points within which the prices should evolve during the week.SUPPORTSWEEKLYRESISTANCESWEEKLYS2S1R1R2EUR/USD1.19421.20981.23161.2411EUR/GBP0.87590.88230.91010.9272EUR/CHF1.06041.06951.08751.0966EUR/CAD1.51801.52801.56921.5948EUR/JPY124.26124.85127.71129.44For personalized advice on currency trends and hedging, contact our trading room: Announcements to follow This week, the focus will primarily be on the US Federal Reserve meeting, which will simply be an exercise in communication for J. Powell. Again, no change in monetary policy is expected. The central bank continues to support the recovery of economic activity, as evidenced by the evolution of its balance sheet. Last December, the balance sheet increased by an unprecedented amount of 141 billion USD. To date, it exceeds 7000 billion USD.Below you will find the publications and events that should have a major impact on currency price developments.DAYTIMECOUNTRYINDICATORWHAT TO EXPECT?25/0110:00IFO Business Climate Index (January)Consensus at 90.0 against 92.1 previously.26/0116:00Conference Board Consumer Confidence (January)Slight increase expected by analysts at 89.0 against 88.6 previously.27/0120:00Monetary Policy DecisionStatus quo expected by the market.Did you enjoy this content? Share it!