The war in Ukraine is already a distant memory for the currency market. Traders are focusing on inflation and its consequences, particularly in terms of central bank positioning. This is a subject that will remain at the heart of discussions throughout 2022 and perhaps even beyond. There are increasing signs that the risk of stagflation is growing in the euro area. Inflation is not temporary, it is partly structural. We will have to learn to live with it.
The pair see-sawed for much of January. The geopolitical risk related to Ukraine obviously had an impact on the exchange rate, but less than one might have thought. The central theme for the pair remains the development of inflation and monetary policy. For the time being, the European Central Bank seems reluctant to normalise its monetary policy faster than expected despite the rebound in inflation (5.8% in February in the euro zone). Conversely, the US Federal Reserve is preparing the foreign exchange market for a 50 basis point rate hike at the beginning of May, after an initial 25 basis point increase in March. Inflation in the US is well above that of the euro area, at 7.9% in February. This certainly explains the rush of the US central bank. In the long term, the tightening in the US will benefit the US dollar. In the medium term, we expect the EUR/USD to remain in a range between 1.10 and 1.13.
The euro showed a solid upward trend against the pound sterling in March. But the future is uncertain. A sustained breach of the psychological 0.85 zone will be required to hope for a continuation of the rise. In this case, the next level to watch would be around 0.8604. The recent rate hike by the Bank of England (by 25 basis points) has not really helped the pound. Forex traders are sceptical about the process of monetary tightening in the UK. The British central bank is facing a complicated macroeconomic situation: soaring inflation (expected to be around 8% in the coming months) and clear signs of economic slowdown. Further rate hikes are likely. This is obvious. But the normalisation process may be shorter than initially expected. This explains why sterling is down over a month against the euro.
The EUR/JPY traded in a very wide range in March as fears over the war in Ukraine caused volatility to rebound. However, the monthly trend was upwards. Once the surprise effect of Russia's invasion of Ukraine had passed, the euro regained considerable ground. As we say in the trading rooms, the event is now 'priced in' (i.e. integrated in the pricing). The pair is currently trading near its five-year highs (the peak is 137.54). We do not expect this price range to be breached for the time being. We should rather have a consolidation of the pair, in the short term.
The euro recovered against the Swiss franc in March. Two factors explain this: the decrease in risk aversion linked to the war in Ukraine (foreign exchange market operators simply moved on) and the interventions of the Swiss National Bank to limit the appreciation of the Swiss franc. Based on the development of sight deposits at the Swiss central bank, there has been a clear increase in intervention in recent weeks. Faced with rising inflation, the Swiss Confederation is considering a gradual exit from ultra-accommodative measures (in this case, negative rates). But this is not expected to happen for several months or quarters, in our view. The urgency is not the same in the eurozone and in Switzerland. Swiss inflation was 2.2% in February, compared to 5.8% in the euro area over the same period.
In February, the EUR/CAD pair lost 1.91%. In March, it fell by 1.57% (almost the same magnitude). The trend is structurally downward for two main reasons: 1) the Bank of Canada is tightening its monetary policy faster than the European Central Bank. This is a fact; 2) the Canadian dollar is supported by the general rise in the price of raw materials, particularly fossil fuels. This will not change any time soon. For several years, there has been a structural deficit of investment in oil infrastructure. This will support the barrel price of black gold in the months and years to come. We are therefore still bearish on this currency pair.
The continued decline of the euro against the Australian dollar in recent months is quite impressive. This was due to both market expectations of a first rate hike by the Reserve Bank of Australia (probably in the summer) and rising commodity prices. Both factors are expected to continue in the short to medium term. In other words, we remain bearish on the pair with a medium-term target of 1.4620.
In March, the EUR/CNH pair was almost stable (-0.07%). We believe that the Chinese authorities are desperate to maintain a stable exchange rate for their currency and that, for the time being, a EUR/CNH pair around 7.00 seems to suit them. From an economic point of view, the situation is deteriorating rapidly in China (as indicated by the contraction of the latest PMI indicators). The war in Ukraine and, especially, the costly zero Covid policy implemented by Beijing (which is starting to be challenged internally) will certainly prevent the Chinese economy from growing as much as expected this year. We do not see how growth could miraculously be around 5% - 5.5% in 2022. This is not possible.
The fall of the euro is not surprising. It could even last in the short to medium term. The Hungarian central bank has so far succeeded in convincing foreign exchange market participants of its determination to fight inflation. We expect the monetary tightening cycle to accelerate in the coming months, which could further support the HUF exchange rate. This weekend's parliamentary elections are not expected to have a major effect on the currency pair. The Russian invasion of Ukraine completely overshadowed the campaign. All the polls indicate that Fidesz, the party of Prime Minister Viktor Orbán, is well ahead. For example, the average of the polls published by Europe Elects puts Fidesz slightly above 50%. This is more than in 2014 and 2018. The next government will not have an easy task. High inflation is slowly but surely eroding strong wage growth.
It is not really surprising that the USD lost some ground against the Hungarian currency in March after having risen by 8.66% in February. This decline is explained both by the decrease in risk aversion (linked to the war in Ukraine) and by profit taking. The downward movement could continue in the short to medium term if the war in Ukraine continues to linger in the background. Indeed, we believe that the Hungarian central bank will have no choice in the coming months but to tighten its monetary policy further. This determination to fight inflationary pressures could have the direct effect of supporting the HUF exchange rate.
| DATE | CURRENCY | EVENT |
| 03/04 | HUF | Parliamentary elections |
| 04-05/04 | CNH | Public holiday in China |
| 05/04 | AUD | Central bank monetary policy meeting |
| 10/04 | EUR | First round of the presidential election in France |
| 12/04 | USD | Consumer Price Index in March (first estimate) |
| 13/04 | USD | Producer Price Index for March (first estimate) |
| 14/04 | EUR | Central bank monetary policy meeting |
| 18/04 | CNH |
Q1 GDP for China |
| 24/04 | EUR | Second round of the presidential election in France |
| 26/04 | HUF | Central bank monetary policy meeting |