Two Camps

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The macro point

There are two camps. There are those who continue to tighten monetary policy at a sustained pace because they believe more needs to be done for inflation to drop and gradually return to the 2-4% range (a credible medium-term level). In this camp, we find the U.S. Federal Reserve (Fed) and the Bank of England (BoE). Last week, both central banks increased their key rates by 75 basis points each (in line with analysts' expectations). They hinted that the magnitude of future rate hikes will depend on the latest statistics that come out. In the case of the Fed, this implies monitoring the upcoming employment report to be published in early December and the next two inflation reports (to be released before the next Fed meeting set for December 14). For now, the U.S. labor market is resilient, although it shows signs of slowing (which is quite normal, given the conditions). Weekly unemployment claims have slightly increased in recent weeks. However, they remain 10% below their level in July. This shows that the U.S. economy is certainly strong enough in the short term to face new rate hikes (ranging from 50 to 75 basis points).

There is also the camp of those who are now more worried about the economic slowdown (or even recession) than inflation. The central bank of Norway and the central bank of Australia are part of this camp. Both have slowed the appreciation of monetary policy by increasing their respective key rates by only 25 basis points last week. In both cases, the risk of recession was mentioned as well as the risk of a housing bubble burst (this risk is more acute in Australia than in Norway according to us). We are not yet in a situation of global monetary policy decoupling (which could revive carry trade strategies on currencies and induce a surge in volatility on major pairs). But it is clear that many central bankers are questioning the economic and financial risks posed by the current cycle of rate increases. There is certainly no good solution. Given the sky-high inflation in most countries, only much more restrictive monetary conditions can reduce the pressure resulting from the Covid period (demand and supply imbalance, disrupted international trade, tight labor market, etc.). But in many cases, this implies accepting a strong economic slowdown or even a recession. Whatever happens in the coming months, there will be damage.

In the case of the eurozone, the strategy of fighting inflation remains the priority. This was well emphasized by European Central Bank (ECB) President Christine Lagarde a few days ago. Martins Kazaks, a member of the Governing Council (rather classified as a hawk, i.e., in favor of a significant monetary policy tightening) even went further during a speech last Thursday. He indicated that a recession is now the central macroeconomic scenario for the eurozone. We did not doubt it. But this is the first time an ECB member acknowledges it publicly. Even if the energy crisis is less intense than expected this winter, we will clearly not escape a long GDP contraction (it will be more difficult for some eurozone countries than for others, obviously). In France, it is likely that the tariff shield (which is supposed to be maintained until 2027 according to the budget project currently being debated in Parliament!) combined with the electricity guarantee for businesses will help avoid a too strong decrease in purchasing power and a sharp increase in business bankruptcies. In contrast, the situation is more complex in Germany as the country is historically very dependent on Russia for its energy supplies. Moreover, it decided to phase out nuclear power (certainly mistakenly). On the macroeconomic level, it is better to expect the worst in the coming months. We may have a surprise, after all.

On the foreign exchange market, there is no significant change in trend. We are still facing a risk-averse market (which favors the U.S. dollar). The EUR/USD has resumed its decline in recent sessions. The next level to watch is the support zone of 0.9580, which might be reached in the short term. It is likely that the euro will attempt a rebound again in the coming weeks. But as we have seen repeatedly since the summer, this will be short-lived. The EUR/GBP pair has hardly changed. We remain within the same bounds as last week (a few pips apart). Finally, the euro lost ground against the Japanese yen on a weekly basis (-1.50%). This reflects more the traders' concerns about the eurozone's economic trajectory than a return of confidence in the yen. We continue to believe that the repeated interventions by the Bank of Japan (BoJ) to support the archipelago's currency are doomed to fail in the medium term. In October, the BoJ spent a record amount of 42 billion euros to defend its currency. It's simply unprecedented.

The supports and resistances displayed below indicate respectively the lows and highs within which courses should evolve during the week.

	SUPPORTS	WEEKLY	RESISTANCES	WEEKLY
	S2	S1	R1	R2
EUR/USD	0.9334	0.9580	0.9922	1.0078
EUR/GBP	0.8335	0.8506	0.8848	0.9018
EUR/CHF	0.9520	0.9657	0.9932	1.0103
EUR/CAD	1.2929	1.3172	1.3658	1.3901
EUR/JPY	141.61	142.92	146.64	149.05

On the foreign exchange market, there is no significant change in trend. We are still facing a risk-averse market (which favors the U.S. dollar). The EUR/USD has resumed its decline in recent sessions. The next level to watch is the support zone of 0.9580, which might be reached in the short term. It is likely that the euro will attempt a rebound again in the coming weeks. But as we have seen repeatedly since the summer, this will be short-lived. The EUR/GBP pair has hardly changed. We remain within the same bounds as last week (a few pips apart). Finally, the euro lost ground against the Japanese yen on a weekly basis (-1.50%). This reflects more the traders' concerns about the eurozone's economic trajectory than a return of confidence in the yen. We continue to believe that the repeated interventions by the Bank of Japan (BoJ) to support the archipelago's currency are doomed to fail in the medium term. In October, the BoJ spent a record amount of 42 billion euros to defend its currency. It's simply unprecedented.

Below are the publications and events expected to have a major impact on currency prices.

DAY	TIME	INDICATOR	WHAT TO EXPECT?
11/10	2:30 PM	Consumer Price Index (October)	Slight decrease expected year-on-year to 8.1% from 8.2% in September
11/11	8:00 AM	GDP publication for the third quarter	No surprise, GDP contraction (-0.2% compared to the previous quarter)
	8:00 AM	Manufacturing output (September)	Decline of 1.6% in August. The negative trend is expected to continue.
	8:00 AM	Consumer Price Index (October)	Analysts' consensus at 10.0% year-on-year change compared to 10.4% in September