Scary

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The macro point

Currency market volatility remains contained for now. However, it is crucial to be very vigilant regarding the developments of American regional banks. We are not facing a Lehman Brothers scenario. However, speculation against these entities, which are a major keystone of the American financial system, could, if it persists, lead to negative consequences on all financial markets, including the currency market. One word: vigilance. There are weeks more difficult than others. It must be acknowledged that what is happening on the other side of the Atlantic is reminiscent of the 2007-08 financial crisis. The collapse of American regional banks, even if it is not on the same scale as the last financial crisis, will have a lasting negative impact on the American economy through a reduction in lending in a context of high interest rates. This does not necessarily mean that the American economy will enter a recession. In the past, this was not systematically the case in a similar situation. But it is clear that it complicates the task of the authorities, particularly the Federal Reserve (Fed). Almost every week, a new regional bank must be rescued. At this stage, out of 349 American regional banks, only about a dozen are truly on the brink. But it is well known that panic phenomena are difficult to contain, which is why the authorities must act diligently to manage the problems of each bank on a case-by-case basis. The situation is undeniably worrying. Last January, the total market capitalization of listed American regional banks was $475 billion. Today, it is equivalent to $100 billion. This equates to a 78% drop in just four months. This perfectly reflects the panic surrounding this key player in the American banking system, especially in the commercial loan segment. Moreover, the situation of American regional banks has prompted the Fed to pause its interest rate hike policy to avoid exacerbating financial tensions. As expected, the central bank once more increased its main policy rate by 25 basis points within the range between 5% and 5.25%. But no further rate increases are planned afterward. There is no choice. It is necessary to stabilize the financial sector before tackling inflation. Fortunately, the latter is retreating. The only downside: inflation in the services sector is not receding. It is likely that the Fed would have liked, in an ideal world, to increase rates a little more to ensure that inflationary pressures recede sustainably. Not so long ago, markets had anticipated a terminal rate close to 6%. It will be 5.25% ultimately, due to banking difficulties. The money market also expects the Fed to be forced to quickly ease financial conditions by lowering rates. The first rate cut is scheduled for September. At this stage, attention should not be too focused on these projections, which fluctuate based on FOMC member comments and economic data. At most, it shows that the market does not believe in another rate hike at all. On the other side of the Atlantic, the issue for the European Central Bank (ECB) was lesser. Although the institution has formally abandoned forward guidance for a case-by-case approach depending on statistics, it has never hidden its desire to increase policy rates again. The increase was 25 basis points (against 50 basis points at the last meetings). Further hikes should follow according to ECB President Christine Lagarde. The consensus of economists anticipates at least one new increase of similar magnitude in June. The economic and financial situation is different in the eurozone, which gives the ECB more leeway. Inflation is receding more slowly than in the United States, hence the need to further tighten monetary policy in the short term. However, as is the case for our American friends, the problem is mainly concentrated on inflation in the services sector, which remains high. Moreover, for the moment, the tightening of financial conditions is not causing collateral damage. Loan granting is decreasing, but it is inevitable (indeed, it is a sought-after effect of rate hikes). But the banking sector is perfectly stable and is not the subject of any speculation, unlike what is happening in the United States. Even in countries considered at risk a few years ago, like Italy or Greece, there is no palpable tension on the banks. This is good news.

Technical point

In the foreign exchange market, the EUR/USD pair saw profit-taking at the end of the week (hence the 0.96% depreciation). It continues to move around the psychological area around 1.10. The market lacks dynamism, and investors need new arguments to go higher. The monetary policy and rate differentials between the United States and the eurozone are no longer sufficient. We believe that in the coming weeks, the EUR/USD should continue to hover around 1.10, without any real ability to break through the resistance zone located at 1.1090 (this is the upward threshold to monitor). For other pairs, we do not observe any change in trend. Everything is occurring as expected: bearish bias for EUR/CHF, bullish bias for EUR/JPY and EUR/CAD, and range situation for EUR/GBP. The supports and resistances shown below indicate the low and high points within which the exchanges should evolve during the week.

	Weekly Supports		Weekly Resistances
	S2	S1	R1	R2
EUR/USD	1.0740	1.0866	1.1090	1.1166
EUR/GBP	0.8567	0.8668	0.9000	0.9092
EUR/CHF	0.9520	0.9692	0.9934	1.0050
EUR/CAD	1.4437	1.4614	1.5024	1.5181
EUR/JPY	144.38	146.13	150.62	153.35

Announcements to follow

In theory, the release of US inflation figures should be the highlight of the week in the foreign exchange market. But since the Fed has decided to pause monetary policy, it is unlikely that the first estimate of consumer prices in May will have a real impact on currencies. However, we must be very vigilant regarding the evolution of American regional banks. For now, the foreign exchange market has reacted fairly little. At most, it has accentuated the decline of the Dollar Index (but other, more significant factors are also at play). On the other hand, if the panic is not contained, it is not excluded that this could lead to more significant repercussions on financial markets that may extend beyond equity markets. This could notably cause turmoil in currencies. Hence the need to closely monitor this fragile market segment in the coming weeks. Below you will find the publications and events expected to have a major impact on the evolution of currency exchange rates.

Day	Time	Country	Indicator	What to expect?
05/10/2023	14:30	USA	Consumer Price Index (April)	This will be one of the main statistics of the week. Increase to 5.2% year-on-year against 5.0% previously.
05/11/2023	13:00	UK	Central Bank Meeting	Increase of the key rate by 0.25% to 4.50%.
05/12/2023	08:00	UK	Q1 GDP	Previous at 0.1%.