EUR/USD: A reshaped interest rate environment

The euro, not without nervousness, formed a second consecutive doji star candlestick pattern on Wednesday, as the 20-day moving average was poised to fall below its 50-day counterpart. This occurred in a climate unfavorable to risk-taking, given the current geopolitical context: "Negotiations between the US and Iran are at a standstill, leaving the Strait of Hormuz closed," note economists at J. Safra Sarasin, taking a broader view beyond the short term, which focused on hopes for diplomatic progress that were dashed.

"Worsening supply chain shortages continue to fuel rising inflation expectations, while bond markets bear the brunt of the consequences. Soaring energy prices also weighed on the eurozone's trade surplus in March. But this is not the only factor. Weak exports also contributed to the narrowing of the trade surplus. With imports expected to remain high in the coming months and cyclical data continuing to deteriorate, we do not anticipate any improvement in the short term, which is a temporary negative factor for the euro," the private banking executives continued.

Traders now have a concern for the Old Continent: that of a resurgence of inflation fueled at its base by firm oil prices, all against a backdrop of slowing already sluggish growth. This slowdown could be psychologically reinforced by investors as the prospect of an ECB interest rate hike gains traction.

Alex Barade, an analyst for IG France, has compiled the data (both figures and language) supporting this view.

"Markets are still pricing in an odds of over 80% for a 25 basis point increase in the deposit rate in June, which would raise it from 2.00% to 2.25%".

"The comments made this morning by Isabel Schnbel, a member of the ECB's Executive Board, support this view. She stated that 'in the current context, a rate hike in June seems necessary to me.' She added that 'given the magnitude and persistence of the current shock, waiting (looking through) is no longer an option in my opinion.' She also stated that 'even if the war were to end today, global energy infrastructure and supply chains have already suffered significant damage.'" "In terms of persistence, we are actually exceeding the adverse scenario, which assumed a rapid normalization of oil prices."

"This proactive stance was also demonstrated by Francois Villeroy, a member of the Governing Council, who is usually rather centrist in his positions." He stated yesterday that "Households and businesses can trust us to bring inflation back to 2% in the medium term; we will not hesitate to act to achieve this if necessary."

The pressure on interest rates is palpable on both sides of the Atlantic: "The 30-year US Treasury yield briefly returned to levels not seen since the subprime mortgage crisis of 2007, gradually fueling the idea of ​​a regime of persistently higher interest rates," notes Thomas Giudici, Head of Fixed Income at Auris Gestion.

"Several structural factors are also beginning to contribute to this thinking: persistent pressure on certain strategic raw materials linked to the need for sovereignty and reindustrialization in a context of deglobalization, but also the rise of the AI ​​theme, which, while often presented as structurally deflationary in the long term, initially requires considerable investment and capital expenditure volumes." Added to this is the budgetary issue, with public deficits continuing to widen. In the United States, military spending related to the conflict is exacerbating an already severely strained fiscal trajectory, while in Europe, the IMF recently reiterated its concerns about the trajectory of French public finances and the need for a swift and credible fiscal adjustment.

On the statistical front, the main figure released yesterday concerned US consumption, or at least consumer confidence as measured by the Conference Board. The index remained virtually unchanged from last month at 93 points, slightly exceeding expectations.

Right now, the EUR/USD is trading at $1.1642.

KEY TECHNICAL ELEMENTS
From a technical perspective, the euro/dollar pair is now encountering a pivotal zone. After erasing much of its decline related to the acute phase of the conflict, it is trading near the upper limit of its range.