Towards Parity?

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The macro point

The euro collapses against the US dollar. Last week, the single currency reached a low close to 1.0470. The long-term trend is bearish. There is little doubt about it. The accumulation of bad news on the economic front prompts traders to fall back on the US dollar. In times of risk aversion, the greenback is the ultimate safe haven. This was the case during past crises. It will be the case again this time. The foreign exchange market faces numerous concerns: soaring inflation in developed countries, risk of recession in the eurozone (growth in the first quarter was zero in France!), marked economic slowdown in China due to the pandemic, geopolitical risk (Ukraine), and disappointing economic performance in the United States (surprise GDP contraction of 1.4% in the first quarter). There is not a single economic zone currently escaping the turmoil caused by the rebound in inflation (partly resulting from the war in Ukraine). The coming months will be very complicated. Either inflation subsides thanks to the monetary tightening initiated by central banks, but it is unlikely. The transmission of monetary policy to the real economy takes many quarters. Or several major economies risk entering a phase of stagflation (low growth accompanied by high inflation) or worse, a recession. This is a very serious risk for the United Kingdom in particular. A few days ago, the Governor of the Bank of England (BoE) acknowledged that the possibility of an imminent recession is increasing given the difficulties faced by British households due to rising prices. The economic panorama has deteriorated over the span of a few months. Recall that at the end of last year, many economists and analysts supported that inflation is temporary. Now they all acknowledge that it will be a variable to consider certainly for several more years. For companies, inflation poses serious challenges. In France, the producer price index has just reached a new historical peak, at 24.4% year-on-year. It's huge. There's no choice but to cut margins and/or pass the increase on to the final consumer, when possible. But it's not always easy. It is likely that several industries will face great difficulties in the coming months. We should also expect a strong rebound in business bankruptcies (after the calm of the Covid period). In short: buckle up! The big question driving the foreign exchange market for a few days is whether the EUR/USD will reach parity in the short term or not. Parity does not constitute a technical level for the pair. It's at most a major psychological level. If it were to be reached, it's likely there would be a rebound for the pair afterward. It's still too early to know if this threshold will be breached. In the short term, our target is 1.0274. The combination of a high level of risk aversion in the market and a US central bank perceived as more aggressive than the European Central Bank (ECB) should favor a prolonged decline in the single currency. The only thing that could reverse the trend would be to have a very hawkish stance from the ECB. It’s illusory at this stage. It should also be noted that the process of the yen's decline continues (-1.04% in a month and -5.13% since January against the euro). This decrease is mainly explained by maintaining an ultra-accommodative monetary policy in Japan, while in other developed economies, key interest rates are increasing. It is likely that the EUR/JPY pair will attempt to break through the resistance at 140.01 in the short term. This level has acted as resistance since 2015. The supports and resistances shown below 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	1.0274	1.0401	1.0742	1.0947
EUR/GBP	0.8130	0.8243	0.8444	0.8498
EUR/CHF	0.9954	1.0104	1.0404	1.0520
EUR/CAD	1.2768	1.3143	1.3893	1.4268
EUR/JPY	132.33	134.9	140.01	141.43

This week will be particularly busy with central bank meetings. The analyst consensus expects the US central bank to increase its key rate by 50 basis points (there is little doubt about this) and the BoE to increase it by only 25 basis points. In both cases, the decisions have already been largely priced in. Therefore, do not expect renewed volatility on USD and GBP pairs afterward. On the other hand, any indication regarding the follow-up to monetary policy will need to be closely monitored. For example, there is a debate among analysts about the extent of the possible rate hike in the United States next June. Some predict an increase of 75 basis points (which would be massive!). US unemployment figures are not expected to be much of a surprise. The dynamic remains positive, but if the US economy continues to weaken a bit (as was the case in the first quarter), it is clear that job creation will slow down. This will only be noticeable in several months if this scenario were to occur. Below you will find the publications and events that should have a major impact on the evolution of exchange rates.

DAY	TIME	INDICATOR	WHAT TO EXPECT?
02/05	09:55	Manufacturing PMI (April)	Rebound to 57.6 against 54.1 previously.
	16:00	ISM Manufacturing PMI (April)	Rebound expected by analysts to 58.0 against 57.1 previously.
03/05	10:30	Manufacturing PMI (April)	Previous at 55.3.
04/05	14:15	ADP Private Employment Survey (April)	Significant decrease expected in job creation, at 370k against 455k.
	20:00	FOMC Central Bank Meeting	It is certain, the rate hike will be 50 basis points.
05/05	13:00	Central Bank Meeting	The market hesitates between a 25 basis point increase or a 50 basis point increase (to 1% or 1.25%).
06/05	14:30	Unemployment Rate (April)	Slight decrease in job creation expected at 400k against 431k in March (the latter figure is subject to revision).