The pandemic was not an issue of particular interest for the EUR/USD. This is good news, a sign that the virus is becoming endemic. Conversely, the US Federal Reserve meeting caused considerable turmoil. The central bank did not change its schedule for normalising monetary policy: the first rate hike in March, the end of tapering also in March and the process of beginning to reduce its balance sheet in the summer (in June-July at the earliest). However, Chairman Jerome Powell adopted a very hawkish tone (in favour of monetary tightening), which caused a surprise at the FOMC press conference. Analysts are now expecting five rate hikes this year in the US. This will support the US dollar against a myriad of currencies and especially against the euro. On this side of the Atlantic, the focus was on the European Central Bank meeting. It kept its monetary policy unchanged. It noted that inflation is higher than expected, which should lead to an upward revision of inflation forecasts next March. It has not ruled out a first rate hike in 2022 as well. Volatility in the EUR/USD pair jumped in the wake of this. But in the medium term, we still expect a return to the 1.10 level due to the monetary policy differential between the two sides of the Atlantic.
As expected, the Bank of England raised its key interest rate from 0.25% to 0.50%. This is our scenario for the EUR/GBP in the coming months. We expect two more rate hikes by the end of the summer: in May and August. Each time, we expect an increase of around 25 basis points. It is likely that the Bank of England’s Monetary Policy Committee will try to avoid raising the key interest rate above 1%. Thus, the cost of money will remain affordable and will be able to support economic activity. In the short term, we expect the monetary tightening in the UK to push the EUR/GBP towards the 0.82. For the time being, the political turmoil in the UK regarding Prime Minister Boris Johnson’s future has strictly had no impact on the EUR/GBP exchange rate, but this is something that will need to be monitored in the short term.
The euro rebounded thanks to the European Central Bank meeting on Thursday. But there are numerous risk aversion factors, which should favor the JPY: a resurgence of the pandemic in some countries, uncertainty over changes in monetary policy (particularly in the US) and the continued rise in inflation, for example. Against this backdrop, we can fully anticipate a longer-term decline in the pair. The next long-term objective highlighted by the technical analysis is the support zone located at 126.72. For the time being, we cannot foresee any sustainable rebound, given the current configuration of the currency market.
The EUR/CHF was almost flat in January (+0.80%). The steep drop in the pair has been halted for the moment. This is probably the result of increased interventions by the Swiss National Bank on the foreign exchange market. According to our estimates, the central bank spent CHF 1.86 billion in the first week of January to limit the rise in the CHF. If necessary (for example, if risk aversion increases sharply), it can increase the volume of interventions. In the short term, we doubt that the pair can sustainably fall towards 1.02. The objective often mentioned in trading rooms of a return to parity for the EUR/CHF seems unlikely, in our view. This would lead to a more pronounced depreciation of the EUR/CHF, which the Swiss National Bank would find particularly difficult to stop. This would be very expensive. Instead, we expect the pair to stabilise in the immediate future between 1.03 and 1.04.
In the medium term, the CAD continues to be supported by the sharp rise in the price of a barrel of oil (+14.36% for WTI and +11.37% for Brent over one month) and by the prospect of an upcoming increase in the Bank of Canada’s key rate. A number of analysts were expecting an increase as early as January. It ultimately did not take place, mainly due to the uncertainties weighing on the macro-economy in relation to Omicron, but it has only been postponed. The money market is now pricing in a rate hike as early as March (around 25 basis points). The emerging gap in monetary policy between Canada and the eurozone (where rates will remain very low for the long term) should provide lasting medium- to long-term support for the CAD. We do not currently see anything that would prevent the EUR/CAD pair from depreciating in the future.
The pair see-sawed for much of January. However, it ended up significantly on a monthly basis (+1.39%). This EUR/AUD rally can mainly be explained by profit taking ahead of the Australian central bank meeting and by the impact of the European Central Bank meeting on Thursday. It is likely that a rate hike will occur more quickly in Australia (as early as this year) than in the Eurozone. Going forward, this should favour the Australian dollar relative to the single European currency. Finally, the Australian economy will also benefit directly from fiscal and monetary stimulus in China. We think this is another factor supporting the Australian currency.
After reaching a monthly high of 7.2974 on 14 January, the EUR/CNH fell sharply in the following weeks then rebounded thanks to the European Central Bank meeting on Thursday. But this rebound will be short-lived, in our opinion. In the medium term, we still expect the CNH exchange rate to decline, which would enable China to support its export industry quickly and at a lower cost. This drop in the exchange rate is likely to go hand in hand with other measures to support the economy, specifically the further cut in the key rate by the Chinese central bank. The current rate is 2.85%. We expect it to be 2.5% at the end of 2022-early 2023. China’s economic recovery remains fragile, mainly on account of the numerous measures still in place to control the pandemic. This is having a very perceptible negative effect on small and medium-sized enterprises. China will undoubtedly have no choice but to open the credit floodgates further in the coming months.
For the time being, the Hungarian central bank’s actions are deemed credible by the market. It again increased its key rate, which now stands at 2.9%. In the statement published at the end of January following the decision, the central bank indicated that inflationary pressures will remain, given the congestion in international trade and rising energy and food prices. It is not wrong. Strategic terminals for international trade have recently been closed in China due to Covid, including the Yantian terminal (the country’s third largest port). The Hungarian central banks considers inflation to be a structural issue. To combat it, it will undoubtedly raise rates several times in the coming months. This has helped stabilise the HUF exchange rate against the euro. In January, the Hungarian currency gained 2.85% against the euro. For the time being, the central bank’s strategy has proven to be quite successful.
The Hungarian central bank’s credible monetary policy enabled the HUF to gain against the USD in January (+1.63%). However, this rise may not be sustainable. The combination of rapid monetary normalisation in the US and an already perceptible return of risk appetite on the foreign exchange market should logically benefit the US currency in the long term. We will therefore have to be vigilant. In the short term, this currency pair could be subject to considerable volatility. The Hungarian central bank will hold its next meeting on 22 February.