Preparing to Act

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 not be considered as a basis or motivation to engage in any investment.

The macro point

The fallout from the war in Ukraine on the eurozone is becoming increasingly noticeable. The Sentix Investor Confidence Index collapsed in April, to -9.35 from -7.0 in March. Investors are also worried that the European Central Bank (ECB) may not be able to control inflation in the short term. In response to war crimes committed by the Russian army in Ukraine (notably in towns around Kyiv), the Europeans have decided on a new round of economic sanctions. However, Germany is still reluctant to wield the nuclear option of banning Russian gas imports. According to several experts (such as the political scientist Ian Bremmer, who is highly respected in the United States), such a ban could cost Germany's GDP up to three percentage points (by increasing energy costs and due to potential supply shortages). The country would then be in recession and some other EU countries as well. It is clear that a ban on Russian gas imports is unlikely to be implemented. For Europe, this would mean accepting a recession. It is unthinkable.
In the United States, Federal Reserve (Fed) Vice Chair Lael Brainard has indicated that a significant acceleration of the monetary tightening process is expected in May (at the upcoming FOMC meeting on May 4). In other words, the U.S. central bank is expected to announce an increase in its key interest rate by 50 basis points, after an initial increase of 25 basis points a few weeks ago. This scenario has already been priced into the U.S. dollar for some time. The minutes of the last Fed meeting, released last Wednesday, also confirmed this scenario. FOMC members refrained from being more hawkish (in favor of a rapid rate hike) in March due to the uncertainties inherent to the war in Ukraine. A reduction of the balance sheet (which constitutes another lever of monetary tightening) is also on the table. The FOMC plans a forthcoming decrease of the balance sheet by about 95 billion USD per month. The direction of monetary policy in the United States is clear for the foreign exchange market. This is good news. In the long term, this should rather tend to support the exchange rate of the U.S. dollar against other counterparts.
In emerging countries, the process of rate hikes to combat inflation continues. The Polish central bank once again surprised traders by announcing a tighter policy than expected. The main interest rate was raised to 4.50% from 3.50% previously and 4.0% expected by the analyst consensus. Further rate hikes are to come. The country is facing uncontrollable inflation, at 10.6% year-on-year in March. This is a decade-high level. The next central bank meeting, scheduled for May 5, could again result in a 100 basis points increase. The monetary tightening has not really managed to stem inflationary pressures at the moment (this is normal, it takes time). However, it has helped to support a bit the local currency, the Polish zloty, against the euro (down nearly 6% on a monthly basis). As we have mentioned several times in recent weeks, the period of low rates is truly over.
On the forex market, the euro was under pressure last week. The EUR/USD pair lost 1.8% and the EUR/JPY pair 0.50%. Some analysts attribute the decline of the European single currency to the ‘Le Pen’ risk. Objectively, this is hard to say. We are not in the configuration of 2017. The euro's decline can just as well be attributed to traders' fears about the trajectory of inflation and growth in the eurozone. It is likely that all these factors add up. In any case, this means that the euro's fall could continue in the coming sessions and weeks. It should also be expected that the interventions in forex by the Swiss National Bank will continue. The consensus is that the EUR/CHF could consolidate above the parity threshold in the short term.

The supports and resistances displayed below indicate respectively the lows and highs within which the prices should evolve during the week.

	SUPPORTS	WEEKLY	RESISTANCES	WEEKLY
	S2	S1	R1	R2
EUR/USD	1.0580	1.0650	1.1125	1.1375
EUR/GBP	0.8048	0.8108	0.8440	0.8620
EUR/CHF	0.9940	1.0010	1.0285	1.0400
EUR/CAD	1.3180	1.3440	1.3955	1.4210
EUR/JPY	129.79	132.11	136.29	137.68

All attention will be on the ECB meeting this week. No monetary policy change is expected in the short term. However, pressure is mounting on the central bank to act. Several members of the Governing Council (including Fabio Panetta last week) have clearly hinted that a rate hike could jeopardize economic growth in the eurozone, given the economic issues related to the war in Ukraine. We rather agree with that. For now, the best thing to do is certainly to do nothing.
As information, several major banks are nonetheless considering ECB action in the coming months. Swiss bank UBS expects the ECB to announce the end of its asset purchase program (abbreviated APP) at its meeting on June 9. In addition, the bank expects the central bank to raise its key interest rate for the first time in December, by about 25 basis points. This is a very distant horizon. It has no real impact at this stage on exchange rates. However, it should be kept in mind that a majority of foreign exchange market players are betting on a rate hike in the eurozone, at some point this year (generally in September or December). We will come back to this in due course.

You will find below the publications and events that should have a major impact on the evolution of exchange rates.

DAY	TIME	INDICATOR	WHAT TO EXPECT?
12/04	11:00	ZEW Economic Sentiment Index (April)	After a sharp fall to -39.3, the analyst consensus expects a rebound to 10.0.
	14:30	Consumer Price Index (March)	This will be a painful figure: 8.3% year-on-year against 7.9% previously.
13/04	14:30	Producer Price Index (March)	Another increase expected of 1.0% month-on-month against 0.8% in February.
	15:00	Bank of Canada meeting	The analyst consensus expects a 25 basis points increase of the main interest rate.
14/04	13:45	European Central Bank meeting	No monetary policy change but some Governing Council members are expected to seriously worry about the inflation path.