December 2021 - Monthly Economic Outlook

Gain an overview of the latest developments on the currency market and anticipate fluctuation risks.

EUR/USD

High: 1.1618 Low: 1.1186 Change: -2.28%

The EUR/USD pair has been in a bearish channel since the end of May (when the European economy reopened). The recent test of the June 2020 zone of support at 1.1190-86 triggered a rebound. This explains why the pair shows a positive weekly variation (+0.96%). But this rebound is very likely to be short-lived. The economic horizon is darkening in the eurozone. Austria could enter a recession. Germany is facing an abrupt slowdown in activity. Shortages and rising energy prices continue to be a cause for concern. To this must also be added the European Central Bank’s desire to maintain a stable monetary policy, which has some negative impact on the euro exchange rate. For the rebound to be sustainable and to be called a trend reversal, EUR/USD would need to break through resistance at 1.1375. We’re not there yet.

EUR/GBP

High: 0.8596 Low: 0.8376 Change: +0.12%

In November, EUR/GBP was subject to volatility, trading in a wide range of 200 points. At its November meeting, the Bank of England (BoE) surprised the foreign exchange market by keeping its monetary policy unchanged, having hinted that it was ready to raise its main policy rate. Concerns over the Omicron variant also led to slightly more volatility than expected. At the end of November, the Bank of England’s chief economist, Huw Pill, hinted that he would vote in favour of a rate hike at the institution’s meeting scheduled for 16 December. There can be no assurance at this stage that a majority of Monetary Policy Committee members will do likewise. Caution will be needed on 16 December, as volatility could be very high on GBP pairs. The only certainty we have at this point is that the UK central bank is planning to raise the base rate by at least 0.5% over the next year to bring down inflation.

EUR/JPY

High: 132.57 Low: 127.492 Change: -2.92%

This is a perfect bearish cocktail for the euro. The risks associated with the new Omicron variant, disruption to production chains and runaway inflation raise fears of severe economic consequences for the eurozone in the fourth quarter. This directly impacts the price of the single currency. Traders in the forex market are flocking to safe havens, primarily the Japanese yen. It will take several weeks to know whether the Omicron variant is more dangerous than the dominant Delta variant. During this time, further depreciation of the euro is possible. In terms of monetary policy, there is nothing new. In November, the Bank of Japan reaffirmed its objective of reaching a consumer price index of 2%. This target is very ambitious in our opinion.

EUR/CHF

High: 1.0605 Low: 1.0412 Change: -1.56%

EUR/CHF fell significantly in November. The pair is back to its 2015 levels due to increased risk aversion in the forex market. There are many worrying factors: the new Omicron variant, sharply rising inflation in many countries, continuing shortages and supply chain disruptions. All of these factors represent negative shocks to growth in the eurozone. This is a typical trigger for movements of the euro towards the Swiss franc, which serves as a safe haven. With an exchange rate around 1.05, we could expect the Swiss National Bank (SNB) to step up its currency interventions to limit the appreciation of the Swiss franc. But there is nothing to confirm this for the moment, based on the official figures. However, it is only a matter of time before the SNB intervenes heavily in forex.

EUR/CAD

High: 1.4550 Low: 1.4170 Change: +0.75%

EUR/CAD rebounded strongly at the end of November, although this is a technical movement in our opinion. We still believe the trend on the pair is bearish over the medium term. In order to counter inflation, the Bank of Canada has clearly hinted that a rate hike is likely in the coming months. The market anticipates that the first interest-rate hike will come in early spring 2022. This is the first factor likely to bolster the CAD against the euro. In addition, the Canadian dollar can count on the continued rise in the price of raw materials (in particular due to chronic underinvestment in petroleum infrastructure before the pandemic) to continue to grow. This is the second medium-term support factor.

EUR/AUD

High: 1.5967 Low: 1.5357 Change: +2.22%

The pair saw a strong rebound in late November. But it is still too early to know if this movement is sustainable. For now, the main technical indicators highlight that it is an over-bought movement. We can therefore expect some short-term profit-taking. In the longer term, the Australian dollar should logically benefit from the monetary normalisation process initiated by the Reserve Bank of Australia, which abandoned the yield curve control system at its monetary policy meeting in November. This system allows the central bank to intervene in the debt market in order to prevent the government’s borrowing cost from increasing too much. In addition, the market consensus now anticipates a first rate hike in 2023, rather than 2024 as previously. Conversely, the European Central Bank is not budging one iota, maintaining its monetary policy unchanged despite strong inflationary pressures. The monetary policy differential will influence the trajectory of the EUR/AUD pair.

EUR/CNH

High: 7.4243 Low: 7.1569 Change: -2.79%

The Chinese government wants a strong currency to limit the economic impact of the rise in imported energy products. This explains the month-on-month fall in the euro against the CNH. But given the increased risks of stagflation (declining growth and high inflation), we would not be surprised if the authorities tolerate a higher EUR/CNH exchange rate next year. Economic support measures are also on the table. Several options are possible: a decrease in the bank reserve requirement rate and/or a decrease in interest rates (which would be a first since early 2020).

EUR/HUF

High: 371.98 Low: 358.42 Change: +0.92%

Over the period May to September, EUR/HUF moved within a narrow range of between 350 and 355. The pair has since strengthened, reaching a monthly high of 371.98. The fall in the Hungarian currency is explained by foreign exchange market operators falling back on currencies considered more solid (the euro and US dollar, for example) in times of uncertainty. We continue to believe that the Hungarian authorities want a strong forint, particularly to limit the economic impact of the rise in imported energy products. The central bank will therefore have to act aggressively at its meeting on 14 December to convince the market of its willingness to act to combat inflationary pressures. It will also update its growth and inflation forecasts for 2021 and 2022 at the same meeting. In the short term, EUR/HUF faces strong resistance at 373.15.

USD/HUF

High: 330.92 Low: 307.84 Change: +3.22%

Like all emerging currencies, the Hungarian forint is under pressure. Currency market operators are falling back massively on the US dollar due to uncertainties relating to the latest developments in Covid and inflation. This is a phenomenon that we have seen regularly in times of crisis. The US dollar is the big winner in forex. Strong action from the Hungarian central bank at its meeting on 14 December could temporarily stabilise the USD/HUF exchange rate. But we must not delude ourselves. The current environment is negative for the HUF against the USD and the situation is not expected to improve in the short to medium term. It is not unlikely that the pair returns to its highs of three years ago, at around 340.