The Word of the Year: Inflation

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The macro point

The Word of the Year: InflationMacro PointJust like last week, the evolution of inflation has been at the forefront of concerns. Financial market operators fear that the Biden administration's stimulus plan (negotiated at 1900 billion euros) and the strong rebound in household consumption once restrictions are lifted could lead to a significant rise in inflation in the coming months. This scenario is validated by economists who predict that inflation in the United States is likely to temporarily exceed the target of the American central bank, set at 2%, during the second or third quarter of this year. During his testimony before the American Congress, J. Powell tried to reassure markets by reaffirming that a temporary rise in inflation will not lead to a change in monetary policy.

However, the issue of returning inflation is no longer just an American story. Investors fear that the increasingly solid hopes of economic recovery and rebound in inflation could lead to an undesired tightening of financial conditions in the eurozone, which could harm the ability of eurozone states and companies to refinance at a low cost on financial markets. It is evident that recent developments are increasingly worrying the European Central Bank. A few days ago, Christine Lagarde clearly indicated closely monitoring the evolution of rates on the European bond market. If financing conditions were to deteriorate sustainably, the European Central Bank might be forced to intervene. The good news is that it has a range of effective tools to try to keep rates low, primarily its asset purchase program. We are in a pivotal period for economic recovery. Central banks will have to convince of their ability to stem any lasting surge in inflation.

Technical point

For now, fears of the return of inflation have had a marginal impact on the evolution of exchange rates. This has only resulted in recent sessions in a decline in risk appetite that has mainly disadvantaged emerging market currencies. Developed countries' currencies, except for the Canadian dollar which reacts strongly to jolts in the US bond market, remain for the moment sheltered from these concerns. As proof, the euro has shown excellent performance against some safe-haven currencies, notably the Swiss franc and the Japanese yen. The EUR/CHF pair easily surpassed the psychological threshold of 1.10, even reaching a high point in weekly variation close to 1.11. This strong progression of the pair over such a short period opens the door to short-term consolidation around 1.09-1.10. The euro also performed well against the Japanese yen, with an increase of nearly 0.8% in weekly variation. Finally, there is also a progression of the single currency against the US dollar, but of lesser magnitude (+0.30% over a week). From a technical analysis perspective, the next level to watch for an increase is the resistance at 1.2250.

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

	SUPPORTS	WEEKLY	RESISTANCES	WEEKLY
	S2	S1	R1	R2
EUR/USD	1.1811	1.1957	1.2250	1.2396
EUR/GBP	0.8567	0.8610	0.8801	0.8915
EUR/CHF	1.0756	1.0810	1.1050	1.1100
EUR/CAD	1.5102	1.5211	1.5429	1.5538
EUR/JPY	124.96	126.36	129.50	130.55

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Announcements to follow

This week, it will of course still be necessary to closely watch what happens on the bond market. It cannot be excluded that if inflationary fears persist, it may also eventually reflect on the main currency pairs. Several US statistics are also scheduled, which should provide a better overview of the current state of the US economy. The highlight of the week will undoubtedly be US employment. Thanks to the acceleration of the vaccination process and the gradual lifting of some restrictions since the end of January, the US economy is expected to experience a jump in job creation in February, at 110,000 according to consensus. The unemployment rate is projected to remain stable at 6.3% of the labor force. Even if these positive figures are confirmed, there is still a long way to go before erasing the scars of the crisis. Economists anticipate that only towards the fourth quarter of this year the US economy could return to its pre-crisis level.

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

DAY	HOUR	INDICATOR	WHAT TO EXPECT?
01/03	09:55	Manufacturing PMI (February)	The index is expected to be down sharply to 52.9, but still in expansion territory.
	16:00	ISM Manufacturing PMI (February)	The US manufacturing sector continues to benefit from the Chinese recovery, with an index at a very high level of 58.6 last month.
02/03	11:00	Annual CPI (February)	Inflation is again expected to decline to 0.5% after a previous jump to 0.9%.
03/03	14:15	ADP Non-farm Employment Change (February)	125,000 jobs are expected by consensus compared to 174,000 previously.
	16:00	ISM Non-Manufacturing PMI (February)	The services sector is benefiting from the rapid vaccination campaign in the United States. The index is forecast at 58.5 in February.
05/03	14:30	Employment Report (February)	This will be the highlight of the week. Economists are betting on a jump in job creation to 110,000 and a stable unemployment rate at 6.3%.

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