Euro is on the defensive

The euro is on the defensive: although it started the year with a bang, markets are wondering if they were not too bullish at the start of the month. The pandemic is far from being under control despite the vaccinations that are starting to take place, and new UK, South African and Brazilian strains have appeared. As a result, countries are increasing their preventive measures. The United States has reintroduced travel restrictions, Israel has closed its borders, and lockdown measures have tightened in many countries including Switzerland. In France, for a few days now, the government has been preparing minds for a third lockdown soon as it faces pressure from scientists for whom the UK variant completely changes the situation. Portugal, which had been relatively spared until now, will close its schools, nurseries and universities for 15 days. The impact of all these measures is reflected in the economic data. In Germany, the eurozone’s main economy, the IFO Business Climate Index came out lower at 91.1, even as analysts expected 93.6, above the 92.8 it was in December. This same index for the eurozone came out at 89.4 against 90.4 previously. The EUR/USD parity has therefore lost ground and stood at 1.2100 this morning, down from a high of 1.2349 on January 6th. This situation is also obviously closely monitored by the European Central Bank. As expected, it kept its main rates unchanged for its first monetary policy meeting last Thursday. Christine Lagarde said rates would stay close to zero until inflation approached the 2% target. But she also noted that the strength of the euro makes this objective more difficult to achieve. Asset buybacks will continue until they reach 1.85 trillion, and this amount could be increased. Ms Lagarde believes that the risks of short-term recession due to the pandemic are still present and because of this the ECB will be present in the market at least until March 2022 to support the economy.

Across the Atlantic, the Senate confirmed on Monday the post of Treasury Secretary Janet Yellen, 74 and former Fed Chair. This is the third member of Joe Biden’s government to have received the green light from the Senate. Today is the US central bank’s first monetary policy meeting. Economists expect the status quo but the press release and the words of Jerome Powell, who is entering the last year of his mandate, will be followed closely. The tone could be a little more optimistic thanks to the giant stimulus package and less confrontational relations with the new administration. The bypass of voting members is also an important subject because the new distribution between doves and hawks has a significant impact on the decisions of the Board of Governors. In addition, the institution will be able to note that the US economy is doing relatively well. The purchasing managers’ indices in January fell in most developed countries. The United States is an exception, with the Markit PMI composite index rising to 58 points in January against 55.3 the previous month. Health restrictions did not weigh on the services component either, which rose to 57.5 points from 54.8. Real estate activity also remains very dynamic in the country of Uncle Sam, supported by historically low mortgage rates. In December, housing starts rose to a 14-year high. The increase in building permits, also at the highest since 2006, indicates that this real estate boom is likely to continue. At a more local level, we note that the index of economic activity in Chicago, the third largest city in the United States by population and second industrial centre, known for its agricultural commodity exchange (the CBOT), increased to 0.52 in December versus 0.31 in November.

The major stock exchanges have generally moved in slightly positive territory since the start of the year. The three major American indices even set new records. European stock markets, on the other hand, are evolving in a more dispersed manner. The British FTSE gained nearly 3%, France moved around equilibrium (-0.50%) and some, like Madrid and Milan, penalised by mixed economic statistics, lost a little more than 1%. The SMI, which touched 11,014.28 points on Monday, gained 2.43% at the start of the year and has almost regained the levels before the pandemic which had seen it reach a new historical record of 11,270.00 points on February 20, 2020.