March 2021 - Monthly Economic Outlook

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

EUR/USD

High: 1.2240 / Low: 1.1957 / Variation: -0.16%

The euro (EUR) remained fairly stable against the US dollar (USD) month-on-month, within a range of between 1.1957 and 1.2240. For the time being, investors’ concerns about a sharp rise in inflation, related to the recovery in demand and the Biden administration’s stimulus plan, which could lead to a shift in monetary policy, have had no impact on the exchange rate.

On both sides of the Atlantic, central bankers have been trying very hard to reassure forex traders over the last few days, confirming that monetary policy will remain accommodative for the long term in order to facilitate the post-Covid economic recovery. However, if inflation concerns persist, leading to an increase in the cost of refinancing for European governments, we cannot rule out the European Central Bank being forced to intervene to ensure low interest rates.

In concrete terms, the central bank could simply accelerate the pace of its asset purchases on the bond market, which would tend to weaken the single currency. We are in a difficult market environment, as the issue of inflation expectations could undermine the ongoing economic recovery if it persists.

EUR/GBP

High: 0.8853 / Low: 0.8542 / Variation: -1.97%

The pound (GBP) continues to capitalise on hopes of a return to normal in the UK, faster than in the eurozone. At the end of February, the UK government announced a plan to lift the lockdown, which is expected to extend from early March to the end of June.

Barring any setbacks, the UK is expected to return to normal life around the summer, thanks to the effectiveness of the vaccination campaign and the decline in new Covid cases. Conversely, the euro is penalised by the obvious delay in vaccination, the questionable management of the European Union and the spread of the English variant to several countries (according to the latest official figures published by France, the English variant now accounts for 50% of infections in the country).

The UK’s lead in vaccination should allow the country to outperform the eurozone economically this year, which should clearly support the pound. This lead should also help mitigate the negative effects of Brexit on the UK economy. We continue to believe that a return of the pair to 0.83 in the medium term cannot be ruled out at all.

EUR/JPY

High: 129.40 / Low: 126.09 / Variation: +1.67%

Despite concerns about the trend in inflation and some turmoil on the bond market, the euro (EUR) continued to hold up very well against the Japanese yen (JPY) throughout February, with a surge close to the psychological threshold of 130.

The EUR/JPY pair will continue to move in line with the risk appetite/aversion sentiment on the FX market. We should also take into account a possible change in the Bank of Japan’s monetary policy in the short term.

Indeed, the central bank is expected to publish its strategic review in March, which should open the door to a cut in rates into more negative territory if the economy needs it. The drawback is that such a measure could further weaken the Japanese banking sector, which is already suffering from a real profitability problem.

EUR/CHF

High: 1.1100 / Low: 1.0785 / Variation: +2.10%

This was the surprise in February. The euro/Swiss franc pair (EUR/CHF) returned to its 2019 highs, without the Swiss National Bank’s intervention. The euro’s jump above the 1.10 zone has been very rapid, opening up the possibility of consolidation in the short term.

However, in the longer term, we reiterate our EUR/CHF target of 1.15. The factors driving the pair to the upside remain. They include the prospect of an economic recovery, the rebound in world trade and the expected surge in demand when restrictive measures begin to recede.

EUR/CAD

High: 1.5541 / Low: 1.5210 / Variation: -1.18%

The euro posted a negative performance against the Canadian dollar (CAD) month-on-month, but we cannot rule out a trend reversal if fears over the return of inflation persist. Indeed, the Canadian dollar is particularly sensitive to the steepening of rates in the US, in line with rising inflation expectations, which could lead the currency to fall against the euro.

We will therefore need to remain particularly vigilant with regard to bond market trends and their impact on the CAD. In addition, the ongoing economic slowdown in Canada, resulting from a recent tightening of restrictions, could also negatively impact the Canadian dollar. From a technical analysis viewpoint, we cannot rule out a return of the EUR/CAD pair to 1.55 within a few weeks.

EUR/AUD

High: 1.5899 / Low: 1.5259 / Variation: -2.58%

The euro posted one of its worst monthly performances against the Australian dollar (AUD). The Australian currency benefited most from the rise in commodity prices in conjunction with a rebound in Chinese demand. It should also be noted that the minutes of the Reserve Bank of Australia’s last meeting were rather instructive.

It indicated that monetary policy could remain on hold for at least two years to allow for an improvement in the labour market, which could lead to higher inflation. Central bank members expect inflation will only reach the 2% target by mid-2023. It is therefore likely that Australia, as is the case in the eurozone and the US, will not exit asset purchase programmes and ultra-low rates any time soon (the key interest rate is at an all-time low of 0.1%). This is further proof that the economic recovery will certainly be slower than many expect.

EUR/CNH

High: 7.9028 / Low: 7.7405 / Variation: +0.15%

The euro (EUR) appreciated against the yuan (CNH) from mid-February, mainly reflecting a drop in the CNH due to forex traders’ lower risk appetite for emerging currencies against a backdrop of concerns about the trend in bond yields.

However, we still believe that the CNH will continue to appreciate over the medium term, driven primarily by the strong economic recovery in China, with a three-month target of 7.70.

EUR/HUF

High: 363.89 / Low: 354.87 / Variation: +2.12%

The euro/forint pair (EUR/HUF) experienced a high level of acceleration over the last few sessions, following a prolonged phase of stability throughout much of February. The publication of the Hungarian GDP figure in the fourth quarter of last year was a positive surprise. According to preliminary data, the economy only experienced a contraction of 0.4% compared to the previous quarter — a good performance when we take into account the implementation of a fairly strict lockdown from mid-November.

The economy is only expected to return to a semblance of normality from spring, due to the acceleration of the vaccination programme. For now, the Hungarian currency is expected to continue to move around the 355 area. Unless the Hungarian currency weakens much more against the euro (which is not part of our central scenario), we do not see the central bank raising rates this year. A rise in rates would have the direct effect of supporting the forint’s exchange rate.