Economists like to compare inflation with a tube of toothpaste (or a bottle of ketchup). In practical terms, what they mean to say is that when inflation spreads to all corners of the economy, it is very difficult to get it back in the tube. This is precisely what is happening today. Core inflation (excluding oil and food) remains high on both sides of the Atlantic. This is perhaps a bigger worry in the eurozone, where there is not even a wage-price connection. As a result, central banks will have their fair share of work in the months to come. The cost of money is set to continue rising. For currencies, this may lead to a resurgence of volatility (related to renewed uncertainty about monetary policy and the inflation trajectory).
It was a short and beautiful story. The EUR/USD is back on a downward trend in the short term. This makes some sense after its sharp rise at the start of the year. When extreme positions are taken in the currency market (on the buy side in this case), the pendulum can subsequently be expected to swing back again. We remain convinced that the euro still has upside potential in the medium term, in particular in view of inflation momentum, which will force the European Central Bank (ECB) to raise its policy rate several times. We forecast a terminal rate of 4% by the summer. If inflation fails to ease, this rate may be even higher. The absence of a recession in the eurozone gives the ECB some leeway to act on the cost of money.
The EUR/GBP’s underlying trend remains upward. But there is no denying that sterling is very resilient. This is partly explained by the fact that the UK economy is doing better than expected. The recession should be milder than forecast (the consensus forecasts a 0.6% drop in GDP this year). A minority of analysts even thinks a recession can be narrowly averted if energy prices continue to fall. But we are of that opinion. Monetary policy is not a particularly differentiating factor for the EUR/GBP at present. We still have a target of 0.90 for the pair. It will be difficult for it to go higher in the medium term.
It’s difficult not to be a buyer of the EUR/JPY pair. The new Bank of Japan governor (who will officially take up his position next month) has fuelled hopes of a possible tightening of monetary policy. Not only has he followed the approach taken by his predecessor, he has also announced that the strategic review of the monetary policy he intends to pursue could take at least a year. In other words, barring a last-minute surprise, Japanese monetary policy will remain ultra-accommodative until at least April 2024. This is obviously deeply negative for the Japanese yen. The wide interest rate differential between Japan and the rest of the world is a lasting drag on the JPY.
Month-on-month, the EUR/CHF is down -0.30%. This is in line with our forecasts for the rest of the year. We expect the CHF to be a stronger performer than the euro since the Swiss National Bank (SNB) is set to be more hawkish (in favor of monetary tightening) than the ECB. We have a medium-term target for the pair of 0.96. In the very short term, the pair will probably continue to trade close to parity (the outlook of a 50 basis point policy-rate hike by the ECB in March is already priced in by the market, for example).
Our scenario for the EUR/CAD pair is unchanged. The lack of upward momentum in the oil price in the short term, together with the prospect of a monetary policy pause in Canada, will weigh on the CAD in the medium term. We still forecast a sharp rise in the oil price from the second half of the year under the effect of Chinese demand. This is bound to aid the CAD. In the meantime, momentum is positive for the EUR/CAD. The pair is currently hovering around 1.44-1.45. It will probably surge above 1.46 in the short term (and hence surpass its annual highs). The market is long (buy).
In February, the Reserve Bank of Australia surprised the currency market by failing to announce a monetary policy pause, causing the EUR/AUD to plunge in its wake. But the upward trend has since resumed, with a sharp appreciation of 2.77% in February. In the long term, the AUD will probably benefit from China’s reopening (because of close economic ties between Australia and China). In the short term, however, the market clearly has a buy position on the EUR/AUD pair, suggesting to us that the appreciation phase is clearly not over.
China’s recovery is materializing, as shown by the latest PMI indicators for the manufacturing and services sectors. This is good news. We expect China to announce a GDP growth target of 5.5% this year. This is ambitious. It will lead to renewed stimulus measures for both the real estate and export sectors. In this perspective, Chine will logically continue to seek a depreciation of its currency. We expect the EUR/CNH to peak at 8.00 this year. Do not forget that in periods of economic stimulus, Beijing has always bet on a weak exchange rate and on real estate (through easier access to loans, for example).
There was nothing new under the sun for the HUF in February. The Hungarian central bank left its monetary policy unchanged (key policy rate at 13%). This is also likely to be the case on 28 March when it meets again. To judge by the central bank’s recent announcements, it wants to take time to better analyze the state of the economy (as it has entered a technical recession and inflation remains high) before taking a decision on interest rates. It may not act again until June. Hungary’s monetary wait-and-see stance is not a game changer for the HUF, in our view. We continue to believe the Hungarian currency will outperform the euro in 2023. At present, this view is shared by the market, since the EUR/HUF pair is down more than 6% year-to-date. We would not be surprised to see the pair return to the 350 zone in the long term.
Monetary policy does not play a major role in explaining the fluctuations of USD pairs at present. It is currency flows that matter. Since the start of the year, we have seen capital flow out of the US (the US market played a safe haven role at the end of 2022) to be recycled in markets considered more risky (generally resulting in a higher return on the cost of money). This is obviously the case for Hungary, where the base rate is 13%. Other European countries are benefiting from this trend. We expect the US dollar’s weak performance to continue in March, and perhaps beyond then. This is beneficial to the HUF.
Economic calendar
| DATE | CURRENCY | EVENT |
| 02/03 | EUR | Eurozone inflation figure for February (preliminary estimate) |
| 07/03 | AUD | Central bank monetary policy meeting |
| 10/03 | USD | US employment figures for February |
| 14/03 | USD | US consumer price index for February |
| 16/03 | EUR | Central bank monetary policy meeting |
| 21/03 | EUR | ZEW index of economic sentiment in Germany for March |
| 22/03 | USD | Central bank monetary policy meeting |
| 28/03 | HUF | Central bank monetary policy meeting |
| 29/03 | GBP | Central bank monetary policy meeting |