Unfounded Fears of Tightening Monetary Policy

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The macro point

Unfounded Fears of Monetary Policy Tightening Macro Perspective Last week's surprise came from U.S. retail sales, which surged by 5.3% in January — the largest monthly increase since these statistics have existed. This significant rise is mainly due to the fiscal measures taken by the American government aimed at households (unemployment benefits and particularly the $600 checks to support household incomes). Considering the rapid acceleration of vaccination in the U.S., which will gradually allow lifting restrictions, and the additional measures currently being discussed in Congress, which could lead to sending new checks to households by mid-March, it is very likely that this rebound in retail sales will continue. The only issue is that it raises market concerns about a significant increase in inflation in the coming months, which could force the U.S. Central Bank to tighten its monetary policy sooner than expected. Clearly, this scenario, often mentioned in trading rooms, seems unlikely to us. Cyclical factors will push inflation higher in the coming months across the Atlantic (examples: stimulus measures and rising commodity prices), but as this increase will only be temporary, it will not lead to a change in monetary policy. This was clearly indicated in the minutes of the last central bank meeting, published mid-last week. As is also the case on this side of the Atlantic, American monetary policy will remain durably accommodative, for at least several years. In Europe, the main focus was the ZEW index in Germany and the Eurozone, which provides an insight into the sentiment of financial analysts. Whether for Germany or the Eurozone, optimism is now the norm with expectations rising strongly regarding economic dynamics. Even though Europe is still lagging behind the vaccination process compared to the United States, a welcome acceleration has been observed in recent weeks. The only risk to consider, which is not priced into the foreign exchange market, is the strong spread of new variants, particularly the English variant. In the span of two weeks, the proportion of the English variant in total infections has doubled in France and Germany. At a minimum, this means that restrictions will not be lifted, even partially, until at least spring — a period less conducive to virus circulation according to scientists.

Technical point

On the forex market, positive economic surprises supported the euro against the JPY and CHF over the past week. Traders, even though aware that the recovery will not be linear, are rather confident about the future, which benefits risky currencies (like the euro) compared to safe havens. However, the widening economic gap between the United States and the eurozone has further penalized the EUR/USD pair. It continues to evolve in a bearish channel. A drop below the psychological threshold of 1.20 would open the door to a more significant depreciation, first towards the supports located at 1.1837 and 1.1800. Finally, note the very sharp drop of the euro against the British currency (-1.40% in weekly variation), explained by expectations regarding the economic rebound for the United Kingdom. If the movement continues, we could see the pair return towards 0.83 in the long term. The supports and resistances displayed below indicate respectively the lows and highs within which the prices should evolve during the week.

	SUPPORTS	WEEKLY	RESISTANCES	WEEKLY
	S2	S1	R1	R2
EUR/USD	1.1837	1.2000	1.2250	1.2355
EUR/GBP	0.8545	0.8600	0.8782	0.8817
EUR/CHF	1.0693	1.0753	1.0935	1.1000
EUR/CAD	1.5101	1.5196	1.5434	1.5487
EUR/JPY	125.22	126.10	128.71	129.03

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Announcements to follow

This week will be marked by a return to the forefront of economic indicators. In line with the ZEW index, the German IFO index is expected to rise in February, aided by hopes raised by the recent acceleration of the vaccination campaign in Germany. Additionally, a new positive indicator concerning American households is expected with the estimate of the Conference Board's consumer confidence index for February. We will end the week with the latest GDP estimates for the fourth quarter of 2020 for Germany and the United States. In both cases, we expect that the implemented restrictions (or even lockdowns for Germany) have weighed less on economic dynamics than last spring. Overall, rather reassuring economic figures are expected, which should therefore favor risk appetite on the foreign exchange market. Below you will find the publications and events that should have a major impact on currency trends.

DAY	TIME	INDICATOR	WHAT TO EXPECT?
22/02	10:00	IFO Business Climate (February)	Expected to rise to 91.8, likely linked to hopes raised by the vaccination campaign.
23/02	11:00	Annual CPI (January)	Last estimate expected at 0.9%.
	16:00	Conference Board Consumer Confidence (February)	Slight increase expected by consensus to 89.6 versus 89.3 previously.
24/02	08:00	Q4 2020 GDP	The market expects a jump to 8.2% in Q4 quarter-on-quarter, despite lockdown measures.
25/02	14:30	Q4 2020 GDP	Last estimate of US GDP with a figure expected at 4.3%, representing an increase compared to the previous estimate (4%).

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