The Magic Number 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 used as a basis for or considered as an inducement to engage in any investment. The macro point For their last major meeting of 2022, the main central banks (Bank of England, Swiss National Bank, European Central Bank, and the US Federal Reserve) opted for security. They all increased their key interest rate by 50 basis points, in line with expectations. No surprise there. Only the central bank of Norway stood out with a rise of its main interest rate by only 25 basis points, to 2.75%. The macroeconomic situation in Norway is different from that in Switzerland or the eurozone, for example. Inflation is well above target, but by tightening its monetary policy too quickly, the central bank fears bursting the housing bubble, which could lead to a severe recession. Therefore, it has no other choice but to cautiously increase the cost of money. This does not mean that the rate hike cycle is near its end. All central bankers agree, the current monetary policy will have to continue. By speculating on a possible rate cut in 2023 (the money market estimates that the Federal Reserve could lower its rate in the second half of next year, which is contrary to FOMC's expectations), foreign exchange traders are mistaken for two main reasons. Firstly, the time horizon of central banks and foreign exchange traders is completely different. Now central banks have a serious problem with inflation, and considering economic support measures is the last of their concerns. Even in France, where the price increase is relatively more contained than in our neighbors, prices are soaring. According to INSEE figures published last week, food prices have risen sharply in one year, with a 60.9% increase for oils, 22.6% for pasta, and 20% for sugar. This situation is untenable. There is no choice but to further tighten the monetary policy to fight against this scourge. This is also the position adopted by the European Central Bank. The updated macroeconomic projections for 2023 and the central bank's communication (forward guidance) confirm that monetary policy will be significantly restrictive in 2023, even if it exacerbates the recession. In concrete terms, the President of the European Central Bank, Christine Lagarde, has opened the door to at least three additional rate hikes next year. Secondly, it is likely that foreign exchange traders are basing their actions on partially biased economic assumptions. At the same time last year, the economist consensus (which often errs!) anticipated a disinflationary shock. The opposite occurred, with inflation spreading across all sectors of the economy. Now, consensus predicts a recession (confirmed by the European Central Bank for the euro area) accompanied by declining but still high and volatile inflation. This is likely. But there must be an awareness of the limits of economic scenarios. Generally speaking, it would certainly be more appropriate to publish economic forecasts in February rather than December, as the first weeks of January are always crucial for a better idea of what the rest of the year holds. In other words, recession and high inflation are very likely in 2023, but this is not certain. There is a significant margin of error. There is one last element that should be noted from the central bank marathon and has been little mentioned. Yet it is crucial. The monetary policy committees of central banks are deeply divided on the extent of upcoming rate hikes. This is unsurprising. This relates to the previous point. There is significant uncertainty regarding the macroeconomic trajectory. This internal division within central banks is very evident at the Federal Reserve and the Bank of England. If we take the British example, six members of the monetary policy committee voted for a 50 basis point rate hike, two advocated for a pause (due to recession fears), and only one desired a larger increase of about 75 basis points. This also underscores that the economic environment in which central banks operate is becoming increasingly complicated. They must address inflation, recession (or for the luckier ones, economic slowdown), and risks to financial stability that have been little discussed until now but are indeed present. From the foreign exchange market's perspective, this means that the clarity of monetary policy will likely be less in 2023 than in 2022. This will likely lead to increased volatility in currencies. On the foreign exchange market, the EUR/USD remains negative over the long term. The euro has dropped over 6% against the dollar compared to its level at the start of 2022. However, the single currency performs better than expected. Some investment banks (like Citi) predicted a fall of the pair towards 0.93 by the end of 2022. This did not occur. This highlights how complex it is to forecast FX over the long term. The euro has also recovered some lost ground in recent sessions. The hawkish tone (in favor of more rate hikes) of the European Central Bank plays a significant role in this. It has led to an increase in yields in the bond market and, consequently, supported the euro's progression. During last Thursday's session (when the European Central Bank announced its monetary policy decision), the EUR/USD made a foray into the 107.36 level. The low volumes, traditional at this time of year, could lead to renewed volatility in the currency market. This is a point to consider. In the longer term, we doubt the EUR/USD has much upside potential. The European energy crisis, which for now is not as bad as expected, remains a significant barrier to further euro appreciation. The supports and resistances displayed below indicate the low and high points within which prices should oscillate during the week.SUPPORTSWEEKLYRESISTANCESWEEKLYS2S1R1R2EUR/USD1.01651.03961.07911.0853EUR/GBP0.84960.86150.88600.9042EUR/CHF0.96010.96990.99101.0003EUR/CAD1.42231.43731.46331.4724EUR/JPY142.04143.91147.07148.59The next two weeks will be quiet from an economic perspective. No central bank meetings are scheduled. No important statistics to follow (apart from the US Federal Reserve PCE core index). It's time to take a break. As every year, we take the holiday break (if you don't know, this expression dates back to the second half of the 19th century and refers to the interruption of parliamentary work!). We look forward to welcoming you back on Monday, January 2, 2023, for a full follow-up on exchange rate news. Thank you all for your loyalty. Happy holidays! You will find below the publications and events expected to have a major impact on currency trends.DAYTIMECOUNTRYINDICATOREXPECTATIONS19/1210:00IFO Business Climate Index (December)Consensus expects a rise to 87.4 against 86.3 in November.21/1216:00Conference Board Consumer Confidence (December)Consensus at 100.00 against 100.20 previously.22/1214:30Q3 GDPNew estimate at 2.9% (in line with the previous one).23/1214:00PCE Core Index (November)Monthly increase of 0.3% against 0.2% previously.