We Are Entering the Hard Part

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The macro point

It is generally considered that May is usually quite favorable for the US dollar. The month is not quite over, but this seems likely to be the case. Traders have repositioned themselves to buy the dollar (which somewhat challenges short-term forecasts on many pairs). The question now is whether this repositioning is sustainable. It is still too early to say. Financial markets have gone through two phases. At the end of 2022, pessimism prevailed for 2023. The energy crisis in the eurozone was expected to set the European economy back twenty years. That did not happen. It was costly, but Europe managed with difficulty to diversify its supply sources. The weather also helped us. Quite logically, the market drastically revised its economic expectations upwards, perhaps a bit too much considering the figures published last week. Germany, often wrongly presented as an economic model to follow on this side of the Rhine, has officially entered a recession after a GDP contraction of 0.3% in the first quarter and 0.5% in the fourth quarter of last year. The technical recession is unlikely to last. However, economists do not expect an economic rebound for Germany, but rather a phase of economic stagnation. This is not encouraging. In France, the situation is better. But the clouds are gathering. Last Thursday, INSEE's economic surveys sent some very grim messages. Here are the titles of the various surveys: "in May 2023, business climate deteriorates significantly in wholesale trade," "employment climate darkens again," "industrial business climate falls below its long-term average" etc. We are likely heading towards a significant slowdown or even slight decline in activity. This occurs at an interesting time since, paradoxically, inflationary pressures are decreasing, particularly at the commodity level. However, the decrease is not sufficient in many cases to completely offset the effect of inflation. Hence the need to continue monetary tightening. The governor of the Bank of France, Villeroy de Galhau, said he expects the terminal rate in the eurozone to be reached this summer (in other words, between June and September). This leaves the European Central Bank (ECB) three opportunities to raise rates (there is no meeting in August). The market still foresees a 56 basis point increase in benchmark rates in the Union. We believe this might be a bit low, given the inflationary pressures that persist. The only good news for the eurozone is that wage increases continue (even if this in turn fuels inflation). The ECB's negotiated wages indicator (which is an excellent indicator of the fundamental wage dynamic in the eurozone) accelerated to 4.3% in the first quarter. It is likely to reach a peak of 5% for the year. Be careful, it is positive but it is only a partial catch-up of inflation. Outside Europe, attention is focused on the United States and China, unsurprisingly. The rating agency Fitch has placed the US sovereign rating under negative watch due to the turmoil surrounding the debt ceiling increase. Such an action means that the agency could short-term downgrade the AAA rating (best possible rating) of the country. All observers agree that the United States does not deserve such a rating in any case. In case of losing the AAA, we doubt it will cause a shock in financial markets. Finally, you may have noted that commodity prices (particularly industrial metals) have been continually falling for several months. After being too optimistic about the Chinese economic recovery, the market is adjusting its expectations. It is clear that the zero-Covid policy has likely reduced the country's potential GDP level. It will be complicated. Let us also add that a new wave of Covid in China is starting to be discussed (the population's immunity rate is low compared to other economies at similar levels). Therefore, expect that the Chinese macroeconomy may cause some short-term jitters.

Technical point

On the forex market, the EUR/USD continues to hover around the 1.07 mark. It is a strategic level to get an idea of the short-term direction of the pair. If in the next sessions, the pair drops sustainably below this level, it is likely that the decline will prevail initially. However, if it stays above 1.07, a rebound can still be hoped for. Obviously, this will depend on many factors, particularly macroeconomic announcements that aren't great at the moment. In the longer term, we believe that the EUR/USD is in an upward trend, at least as long as the pair doesn't drop below 1.0460-50. Regarding other pairs, there is no change in direction. The EUR/GBP has been in a range situation for many months. As for the EUR/JPY, the trend is still upward as long as there is no change from the Bank of Japan. The supports and resistances shown below indicate respectively the low and high points within which prices should move during the week.

	Weekly Supports		Weekly Resistances
	S2	S1	R1	R2
EUR/USD	1.0540	1.0650	1.0989	1.1120
EUR/GBP	0.8501	0.8530	0.8745	0.8991
EUR/CHF	0.9530	0.9609	0.9880	0.9940
EUR/CAD	1.4250	1.4509	1.4703	1.4900
EUR/JPY	144.30	145.40	151.25	152.90

Announcements to follow

An American week is starting. A few weeks ago, we would have told you that the American employment report (due Friday) wasn't going to be of great interest. But some members of the FOMC of the US Federal Reserve (Fed) have sent mixed signals regarding the short-term trajectory of monetary policy. We thought the Fed was on pause. But a minority of FOMC members are advocating for further tightening of monetary policy. It's unlikely they will succeed. However, they will particularly base their arguments on the labor market. Therefore, the figures falling on Friday at 14:30 should be closely monitored. Below you will find the publications and events that are expected to have a major impact on the evolution of exchange rates.

Day	Time	Country	Indicator	What to expect?
06/01/2023	11:00	EUR	New estimate of the consumer price index (May)	Consensus at 7.00%.
06/01/2023	14:15	USA	ADP private employment survey (May)	This is not a statistic likely to move the market. Previous: 296,000 in April.
06/01/2023	16:00	USA	ISM manufacturing index (May)	Consensus at 47.0 against 47.1.
06/02/2023	14:30	USA	Labor Department employment report (May)	This is definitely the key statistic this week. The unemployment rate is announced to increase to 3.5% and job creation to decline to 180,000. This is logical in view of the economic cycle.