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The macro point

Mark this date: February 8, the United States Supreme Court will consider whether American states can disqualify Donald Trump from the presidential ballot due to his challenge of the 2020 presidential election result and his involvement in the events of January 6, 2021. Anything is possible. This means we could see a resurgence of volatility in the foreign exchange market, and potentially a decline in the US dollar if Trump is disqualified. The Federal Reserve (Fed) is on track to achieve its goal: reducing inflation without causing a recession. All conditions seem to be in place for a soft landing of the American economy. Inflation is approaching 2%. All major measures of inflation (consumer price index, core inflation, and core PCE index) are between 3% and 4%. There is a caveat: inflation in services is still too high (5.3% over a year). But it is decreasing. A rebalancing of the labor market is also necessary. This is happening. Job creation is slowing and returning to a more normal pace (around 200,000 per month). Growth obviously needs to be present. It is. The growth carryover for 2024 is already at 1.2%. In view of the good statistics published in January, economists have regularly revised their growth forecasts for 2024 upward, currently at 1.5%. This is significantly better than in the eurozone where recession is looming. Under these conditions, a rate cut is not urgent. This was reiterated by Fed Chairman Jerome Powell following the January FOMC meeting (the body responsible for rate policy in the United States). The money market had to revise its expectations accordingly. A rate cut in March is already ruled out. Investors are now betting on May and June. But, if the economy continues to be as resilient in the coming months, it is not excluded that the first rate cut could occur later, for example in the second half of the year. This is not at all a scenario anticipated by the foreign exchange market. Should this occur, it is highly likely that there would be significant turbulence in currencies, especially the dollar and the euro. While we debate in developed countries about the right time to cut rates, emerging countries, which started the process in 2023, continue to ease their monetary policy. Last week, no fewer than three major emerging countries in Latin America lowered their rates: Chile by 100 basis points to 7.25%, Brazil by 50 basis points to 11.25%, and Colombia by 25 basis points to 12.75%. This is just the beginning. Larger rate cuts are expected in the coming months. This has the effect of supporting the economies concerned. While in most developed economies, growth will be below potential this year, it should exceed potential in emerging countries (at 3.9% according to the International Monetary Fund). Moreover, this leads to a massive influx of capital that tends to support these countries' currencies. The best example is certainly Mexico. The country is experiencing an unprecedented boom in investments from foreign investors which constitutes structural support for the peso. Early this year, there are also setbacks. This is the case for the two main economies in Africa facing an increasingly complex financial situation. Last week, Nigeria was forced to devalue the national currency, the naira, by about 30% (after a similar devaluation last June). It is uncertain whether this will suffice. Egypt is also in trouble. The pressure continues to build for Cairo to devalue. The official rate of the Egyptian pound is currently 50% below its level on the black market – which certainly better reflects the currency’s true value. A devaluation is inevitable, even if it will not resolve all the structural problems of the Egyptian economy.

Technical point

In the forex market, the trend is very clearly favorable to the US dollar. From October 2023 to the end of 2023, the dollar fell. The market anticipated, among other things, that eurozone growth would exceed that of the US economy. No one believes this scenario now. Since the beginning of the year, there has been a return of investors and speculators buying the dollar. This is just the beginning, in our view. Two structural factors will favor a strong dollar: 1) the attractiveness of the US economy. While our productivity is steadily declining, US productivity increased by 3.4% in the last quarter of 2024. This is just one statistic among many showing the resilience of the US economy. 2) the Fed is unlikely to lower its rates as quickly as expected, and surely to a lesser extent than anticipated. All this points towards a decline in the EUR/USD, which is our central scenario for now. The supports and resistances listed below indicate respectively the low and high points within which rates should evolve over the week.

	Weekly Supports		Weekly Resistances
	S2	S1	R1	R2
EUR/USD	1.0611	1.0723	1.1001	1.1054
EUR/GBP	0.8411	0.8433	0.8611	0.8699
EUR/CHF	0.9234	0.9288	0.9455	0.9601
EUR/CAD	1.4401	1.4432	1.4678	1.4801
EUR/JPY	157.01	158.09	160.99	161.68

Announcements to follow

This week, it will be hard to overlook politics. On February 8, the United States Supreme Court will examine whether US states can disqualify Donald Trump from the presidential election due to his challenge of the 2020 presidential results and his participation in the events of January 6, 2021. Anything is possible. We have no visibility on the decision that will be made. At a minimum, this can lead to a resurgence of volatility in major pairs. In case of Trump's disqualification (there are concerns about the political consequences of such a decision), it is likely to cause a resurgence of risk aversion across all financial markets, which could favor the US dollar. Caution is advised as this key deadline approaches, which has somewhat flown under the radar so far. Below you will find the publications and events that are expected to have a major impact on the evolution of currency rates.

Day	Time	Country	Indicator	What to expect?
02/05/2024	00:00	CHI	Effective reduction of banks' reserve requirement rate by 50bps	This is a liquidity measure that will inject 1 trillion yuan into the economy.
02/05/2024	16:00	USA	ISM Non-Manufacturing Index (January)	Previous at 50.6.
02/08/2024	Undefined	USA	Supreme Court decision regarding Donald Trump	The Supreme Court will examine if US states can disqualify Donald Trump from the presidential election due to his attempts to overturn the 2020 election results.