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The macro point

This week marks the swan song for central banks. The Fed, the ECB, the SNB, and the BoE are meeting. But don’t expect any surprises. They are all expected to maintain their current interest rates and remain tight-lipped on the future course of monetary policy next year. We all know that interest rates will decrease. However, it is still too early to determine the exact timing and scope.
It's the final stretch for central banks this week. Four of the world's main central banks, the Federal Reserve (Fed), the European Central Bank (ECB), the Swiss National Bank (SNB), and the Bank of England (BoE), are set to meet. A monetary status quo is widely anticipated, for varying reasons. In Switzerland, inflation has fallen back faster than expected below the central bank's 2% target. Therefore, there is no reason to raise interest rates again. In the United Kingdom, it is rather the ongoing economic slowdown and the risk of recession that will prompt the BoE to keep rates unchanged. In the United States, the economy is surprisingly resilient, as we demonstrated last week, and the disinflation process continues at a good pace, so there’s no reason to make an excessive rate hike. Finally, the ECB keeps the door open for a potential rate hike if necessary. But everyone understands it's a bluff. With a marked decline in credit, one of the main contributors to economic growth, the ECB has every reason to worry about the activity slowdown underway. While the investment outlook for US businesses is well-positioned for next year, in the eurozone, they are at a low due to difficulties in accessing credit. Business lending in the Union is back to its 2015 lows. This is not good news.
Currency traders will be tempted to gather information about the next cycle of monetary easing. This is the topic for 2024. When will central banks lower interest rates? It is likely that in most cases, they will refrain from giving specific indications. It's too early. The money market now anticipates a significant rate drop starting in spring 2024. After weeks of high volatility, we have returned to the expectations at the beginning of last August, but perhaps for better reasons. The anticipated rate drop is justified by the slowing inflation rather than the risk of an impending recession. We believe the easing cycle will be, in many respects, different from previous ones, mainly for two reasons:

We believe the ECB will lead the rate-cutting, potentially as early as March 2024. Historically, over the last nine economic cycles, it has been the Fed that first cut rates eight times. There is therefore just one exception. The rate cut is more justified in the eurozone than in the United States. It appears that the European economy is more sensitive to tightened borrowing costs than the US economy. This is likely due to the federal government extensively resorting to budget deficits (7% of GDP this year), which has offset the harmful effect of high rates on economic activity. This is not the same scenario in the eurozone. Moreover, the growth differential will play a major role. We expect, as is usually the case, that the US economy will outperform the eurozone economy. Consequently, it is mainly in the eurozone where there will be a greater need for rate cuts.

Central banks are less hurried than in previous cycles to massively cut rates. The money market anticipates rate cuts of around 100 basis points on both sides of the Atlantic next year. But this overlooks the fact that inflation is present. Even if it marginally harms the real economy, it is a new factor for central banks to consider. An inflation level higher than what prevailed before Covid will prompt central banks to act cautiously, so as not to allow inflationary pressures to resurface.

Technical point

How will all this translate into the foreign exchange market? Faster rate cuts in the eurozone than in the US go towards weakening the euro. This aligns with the scenario we've highlighted for several weeks: the market is too pessimistic about the US dollar, and the euro is overvalued relative to economic fundamentals. We believe the optimal level for EUR/USD is 1.05. We doubt it will be reached by the end of the year. But it's a consistent target for early next year, especially if the ECB acts before the Fed. In addition, if the US economy outperforms the eurozone, this will increase capital inflows into the US. This is a structural factor that tends to support the US dollar in the long term. Therefore, we are very skeptical about the forecasts from some economists and analysts predicting a lasting bearish cycle for the US dollar due to declining productivity in the US, economic slowdown, and de-dollarization process. These arguments do not seem valid to us. Some are even factually incorrect. The latest data shows that US productivity is increasing. It's a surprise. But it's happening. The supports and resistances below indicate the low and high points within which prices should move over the week.

Announcements to follow

Aside from central banks, which remain the major focus this week, we must keep in mind that the political factor will become a central data point on financial markets in the coming weeks. The primaries for the US presidential election in November 2024 begin on January 15 (Iowa primary). We will soon hear about Donald Trump, his outbursts, and economic protectionism. Unsurprisingly, this latter aspect is at the heart of his economic program. This will certainly cause a renewed volatility in USD pairs in 2024, especially if the prospect of a prison sentence becomes a reality for Donald Trump. We will discuss this fascinating topic in more detail in the coming weeks. Below are the publications and events likely to have a major impact on currency price movements.

Day	Time	Country	Indicator	What to Expect?
12/12/2023	14:30	USA	Consumer Price Index (November)	Previous at 3.2% year-on-year.
13/12/2023	14:30	USA	Producer Price Index (November)	Previous at -0.5% month-on-month.
13/12/2023	19:00	USA	Central Bank Meeting	No short-term monetary policy change.
14/12/2023	09:30	SUI	Central Bank Meeting	No short-term monetary policy change.
14/12/2023	13:00	UK	Central Bank Meeting	No short-term monetary policy change.
14/12/2023	14:15	EUR	Central Bank Meeting	No short-term monetary policy change.