The King Dollar

The information presented in this publication is provided purely for informational purposes and does not constitute investment advice, a sales offer, or a solicitation to purchase, and should in no way serve as a basis or be considered an encouragement to engage in any investment.

The macro point

The dollar index, which measures the value of the greenback against a basket of foreign currencies including the euro, continues its strong upward trend. It is now approaching the level of 105, which has not been reached since 2002. The US dollar is perfectly playing its role as the ultimate safe haven in the foreign exchange market in the face of accumulating economic, financial, and geopolitical risks (global stock market collapse - also called bear market, rampant inflation, war in Ukraine, soaring commodity prices, etc.). This is commonly known as a flight to quality. As long as there is no reversal in the dollar index trend, the ability of other currencies to rebound against the greenback will be weak. Emerging currencies are obviously the most penalized. But this is also the case for currencies of developed countries. The EUR/USD has lost 8.8% since the beginning of the year while the British pound has fallen by 11.3% against the US dollar over the same period.

It seems unlikely that we could see a rapid decline in the greenback. The latest statistics are worrying. In the United States, the consumer price index in April came out at an uncomfortably high level, at 8.3% on an annualized basis. It is slightly less than in March. But it is still too early to consider that the inflation peak has been reached (this is a notion that analysts and economists continue to evoke at the moment). Firstly, a large part of the drop is explained by a temporary decline in gasoline prices in April. Since the beginning of May, gasoline has increased again. Secondly, inflation now seems to be spreading to the service sector. Airfare prices have soared by 33% year-over-year. This confirms that the battle against high inflation being waged by the US Federal Reserve (Fed) will be complicated and long. Several members of the FOMC (the body that decides on interest rate policy) have advocated for an acceleration of monetary tightening. Some have even put on the table the hypothesis of an upcoming rate hike of 75 basis points (however, this is an unlikely scenario).

In Europe, the economic situation may be more complicated than in the United States. Some EU member countries are facing a higher level of inflation than in the United States (it should be noted, however, that the calculation of inflation is different on both sides of the Atlantic). Moreover, the risk of a very clear economic slowdown in the second quarter is becoming apparent. The surge in prices is undermining consumption in several European countries (this is undeniably the case in the UK and France). In view of the comments made by several members of the European Central Bank (ECB) Governing Council last week, there is no doubt that a first rate hike should take place next July in the eurozone. The magnitude of this increase is debated (15 or 25 basis points). Furthermore, it is now almost certain that the eurozone will exit the long period of negative interest rates by the end of the year at the latest. This means, in particular, that the cost of credit will become more prohibitive. The trend has already started on mortgage and business loans for several months. For now, the prospect of a rate hike by the ECB has not provided any support to the single currency. It is down by 1.75% against the US dollar on a weekly basis. Traders do not seem to believe that the central bank is capable of making the necessary decisions (and certainly with negative economic repercussions in the short term) to bring inflation back to the 2% target. This is also an opinion shared by Mondial Change. It is likely that the ECB will be less aggressive than the Fed in its process of normalizing monetary policy. Several factors could encourage caution. The risk of financial fragmentation of the eurozone (in other words, the fact that Italy's risk premium increases sharply, undermining its refinancing capacity) is one of these factors.
In these conditions, we still maintain a bearish view on the EUR/USD in the short and medium term, like almost all market players. To our knowledge, no major financial institution forecasts an upcoming rise in the euro against the US dollar. From a technical analysis standpoint, support levels at 1.0358 and 1.0269 should be monitored this week.

The supports and resistances displayed below respectively indicate the low and high points within which the rates should evolve during the week.

	SUPPORTS	WEEKLY	RESISTANCES	WEEKLY
	S2	S1	R1	R2
EUR/USD	1.0269	1.0358	1.0653	1.0860
EUR/GBP	0.8288	0.8414	0.8665	0.8732
EUR/CHF	1.0278	1.0350	1.0586	1.0740
EUR/CAD	1.3197	1.3330	1.3689	1.3901
EUR/JPY	129.48	131.99	137.66	140.82

The economic calendar is almost empty. The inflation figures expected correspond to a new estimate. Generally, there is no deviation from the first estimate. The war in Ukraine is no longer a subject for the foreign exchange market for a while now, as we recalled recently. Marginally, the current turmoil in the stock markets could continue to favor a decline in the US dollar (as mentioned in the introduction).

Below you will find the publications and events that should have a major impact on the evolution of currency rates.

DAY	TIME	INDICATOR	WHAT TO EXPECT?
18/05	01:50	GDP (Q1)	Increase to 1.4% vs. 1.1% previously.
	08:00	Consumer Price Index (new estimate for April)	The consensus is for an increase to 8.5% year-over-year. The Bank of England has already warned that inflation could reach 10% this year.
	11:00	Consumer Price Index (new estimate for April)	Consensus at 7.5% year-over-year (in line with the first estimate)
19/05	14:30	Philadelphia Fed Manufacturing Index (May)	Decrease to 17.2 vs. 17.6 in April. Rising prices remain the number one problem.