The Return of Inflation The information presented in this publication is communicated 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 or considered as an incentive to engage in any investment. The macro point The Return of InflationThe Macroeconomic OverviewSince the beginning of the year, the pandemic and inflation have been the two major focal points in the forex market. Regarding the pandemic, signals have become increasingly positive as vaccination accelerates in developed countries. Continental Europe is catching up, which should help save part of the tourism season that is so crucial for the economic dynamics in southern countries (for example, tourism contributes 30% to Malta's GDP when both direct and indirect effects are included). Following Spain's example, Italy announced last week that it is ready to welcome foreign tourists this summer. With price reductions, accelerated vaccinations, and a more or less flexible health protocol, everything is being done to attract tourists to the Mediterranean shores. It is therefore likely that GDP in the third quarter will experience a strong and clear rebound in most European economies.In terms of inflation, all signals are flashing red. The Bloomberg index of commodity price changes is at its highest level since 2011. In the United States, five-year inflation expectations reached their highest point since April 2011 at 2.69% late last week. Faced with rising intermediate consumption prices, manufacturers are starting to pass these increases to their sales prices, fueling an inflationary spiral. However, this trend is more pronounced in the United States than in the eurozone. Nonetheless, the rise in inflation should only be transient. At least that's what central bankers are telling us. A few days ago, J. Powell reaffirmed that U.S. monetary policy will remain accommodative and that a rate hike to counter inflation is not an option currently on the table. His goal is to completely erase the economic scars of the crisis. “The American economy will only reach its full potential when everyone can contribute and share the benefits of prosperity,” he recalled. There is currently no question of modifying the asset purchase program and even less of increasing interest rates. This is rather good news for the market and also for risky assets (such as the euro or commodity currencies).On the central bank front, as expected, the Norges Bank (central bank of Norway) maintained its key rate at a historic low of 0%. However, due to significant and lasting inflationary pressures (especially in real estate), the Norges Bank is likely to be the first central bank of a developed country to raise its rates later this year. The impact on the EUR/NOK was minimal, with the pair ending almost stable in weekly variation (+0.07%). Finally, the Bank of England indicated it will slow down the pace of its asset purchases, which was anticipated by traders. It follows the path taken by the Bank of Canada a few weeks ago. Again, the impact on the exchange rate of the pound sterling was minimal. The EUR/GBP pair remains anchored between 0.85-0.86, as has been the case for a month. Technical point The flagship pair of the forex market, EUR/USD, saw a 1% increase last week, still hovering around the 1.20-1.21 area. Risk appetite related to the acceleration of vaccination and the economic reopening manifesting in Europe continues to support the single currency. From a technical analysis perspective, a close above the resistance at 1.2200 this week could allow for an acceleration towards the 1.2300-1.2329 area in the medium term. As was the case from May to July 2020, the euro fully benefits from the exit from lockdown and the subsequent economic improvement. However, we are more cautious about the future, as many uncertainties remain regarding the upcoming fall.The supports and resistances displayed below indicate the low and high points within which prices should evolve during the week.SUPPORTSWEEKLYRESISTANCES WEEKLY S2S1R1R2EUR/USD1.19291.19751.22001.2329EUR/GBP0.85000.85950.87490.8801EUR/CHF1.08051.09071.11101.1210EUR/CAD1.41901.45301.49991.5253EUR/JPY127.02129.18132.47133.50For personalized advice on currency trends and hedging, contact our trading desk: Announcements to follow This week, risk appetite in the forex market is expected to be further fueled by strong economic statistics – widely anticipated by traders. The German ZEW index for May will be the main European announcement of the week. Consensus is for a jump to 79.0 from 70.7 previously. Although this statistic is rather minor, it can sometimes cause some volatility in the EUR/USD pair if the final figure differs greatly from expectations. Hence the need to be vigilant. Also noteworthy this week are several British figures (including the heavily lockdown-impacted first-quarter GDP) and new US inflation numbers. Let's recall that the market anticipates the peak of US inflation to occur this month.Below are the publications and events expected to have a major impact on currency movements.DAYTIMECOUNTRYINDICATOREXPECTATION ?11/0511:00ZEW Economic Sentiment Index (May)Increase to 79.0 from 70.7 previously.12/0508:00First Quarter GDPConsensus at -8.1% from -7.3% year-on-year.08:00Manufacturing Production (March)Increase of 0.5% from 1.3% previously.14:30Core CPI (April)Stable at 0.3% month-on-month.13/0514:30Producer Prices (April)Decrease to 0.3% from 1.0% previously.Did you like this content? Share it!