Transition Week

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The macro point

Transition WeekMacro FocusIt's a transition week that begins, ahead of the much-anticipated meeting of the U.S. central bank on December 14 and 15. On this occasion, the institution is expected to debate an acceleration of the tapering process (which corresponds to the decrease in asset purchases) to combat inflationary pressures. The central bank's chairman, Jerome Powell, shared his doubts with U.S. lawmakers about the evolution of inflation during a Congressional hearing early last week. He acknowledged that inflation might not be transitory. "It's probably the right time to retire that word," he admitted. Until now, the U.S. central bank kept repeating that the observed inflation, largely linked to the pandemic, would not be enduring. Recent figures contradict this statement. Inflation is becoming more widespread and also affects wages. The United States is certainly facing what's known in economics as a price-wage loop. Workers are demanding higher wages to cope with inflation, which in turn fuels it. Additionally, there is a labor shortage in many sectors. For the first time in decades, the balance of power between employees and employers has shifted across the Atlantic. In the eurozone, inflation is also rising. It reached 4.9% year-on-year in November, marking a high point in twenty years. The surge in energy prices is staggering: +27.4% year-on-year. This could last several more months, likely until February or March 2022, according to experts. For now, the European Central Bank maintains that inflation will gradually decline starting next year. This is optimistic. Its inflation forecasts for 2022 and 2023, at 1.7% and 1.5% respectively, will certainly be greatly exceeded. Around the world, the trend of increasing key interest rates continues. According to U.S. bank Goldman Sachs, there have been a total of 101 rate hikes by 39 central banks since the beginning of the year. Central banks in emerging countries, such as Russia and Brazil, have reacted the fastest and most strongly to inflationary pressures. They have more experience in managing inflationary surges than central banks in major developed countries. More rate hikes are expected in the coming weeks and months. Regarding the pandemic, all continents are now affected by the Omicron variant. The United States does not plan stricter measures. In contrast, several European countries are opting to reinstate restrictions (Germany, for example). The debate on mandatory vaccination will be a major focus in Europe. The European Commission wants the topic addressed. However, it is certainly very difficult to implement in practice. It is still too early to judge the economic consequences of the new wave.

Technical point

In the foreign exchange market, the decline of the euro against the US dollar continues. The disappointing US employment figure in November caused some volatility. But it does not change the fundamental trend. Over a month, the EUR/USD pair has depreciated by 2.6%. Since the beginning of the year, it has lost 7.6% of its value. Unless there is a sustained breach of the resistance at 1.1425 (see table below), the downward trend should continue. The next target for the pair is at 1.1132. It will be reached shortly, in our view. The euro is also evolving in a long-term bearish channel against the Canadian dollar. Since the start of the year, the EUR/CAD pair has lost 7% of its value. The Canadian dollar is supported by the prospect of monetary tightening by the Bank of Canada in the first part of 2022, and marginally by rising energy prices. The technical levels to watch are the support at 1.4263 (which is still somewhat distant) and the resistance at 1.4596. The supports and resistances displayed below indicate the respective low and high points within which the prices should evolve during the week.

	SUPPORTS	HEBDO	RESISTANCES	HEBDO
	S2	S1	R1	R2
EUR/USD	1.1000	1.1132	1.1371	1.1425
EUR/GBP	0.8334	0.8410	0.8592	0.8690
EUR/CHF	1.0285	1.0300	1.0511	1.0588
EUR/CAD	1.4047	1.4263	1.4596	1.4717
EUR/JPY	124.89	126.10	128.56	129.35

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Announcements to follow

The main statistic this week will be the ZEW Economic Sentiment Index in Germany for December. A new drop raises fears of economic contraction in Germany at the end of the year. New restriction measures do not help. On the central bank side, the main event will be the Bank of Canada meeting this Wednesday. No change in monetary policy is expected by analysts, in the short term. The central bank should leave the door open to a first rate hike in 2022, despite uncertainties regarding the pandemic. Below are the publications and events that should have a major impact on the currency market.

DAY	TIME	INDICATOR	WHAT TO EXPECT?
07/12	11:00	ZEW Economic Sentiment Index (December)	Very sharp decrease expected, from 31.7 to 20 in the space of a month.
08/12	00:50	Q3 GDP	Exit from contraction. GDP growth expected at 0.4% quarter-on-quarter.
	16:00	Bank of Canada Meeting	No change in monetary policy expected.
10/12	14:30	Core CPI (November)	Decline over a month to 0.4% against 0.6% in October. But inflation remains very high.

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