(News Bulletin 247) – The sharp rebound of the second half of May on the EURUSD spot is now almost fully retraced, in a market distressed by the end, however clearly announced, of the era of free money. The relative severity of the ECB’s tone at the end of the last Board of Governors, the chronic inflation of great firmness on both sides of the Atlantic, point to a monetary turn that is probably tighter than expected.
As a reminder on Thursday, the European Central Bank completed a key meeting of its Board of Governors. If the powerful Frankfurt Monetary Institution has not yet touched the cost of money itself, it has ratified the end of its asset buyback program on the markets. The institution’s president explicitly announced a 25 basis point (0.25 percentage point) increase in its interest rates in July, which will mark the first rate hike since May 2011, but also signaled that it could give a new tightening in September and if necessary even more strongly, a priori by 0.5 point (50 bps).
Beyond the negotiation of this perilous monetary reversal for growth, the ECB must deal with significant bond yield spreads (the famous spreads), between Germany and Italy. “While the ECB is logically following the movement initiated by the other central banks to fight inflation, it is, on the other hand, powerless against the risk of fragmentation (ie an excessive rate difference between countries) in the euro zone” warns Thomas Giudici, co-head of bond management at AURIS Gestion. “If Christine Lagarde has made it a priority, very few elements have been provided on this point to reassure the markets.”
On Friday, it was the turn of US inflation to focus the attention of operators, as an essential working basis for the Fed in the construction and management of its monetary trajectory. On the broadest product base (food and energy included), prices increased monthly by 1%, against 0.7% expected, and 0.3% in April… What further consolidate the he idea of ​​very firm monetary tightening, weighing on risky assets. At the end of May, inflation at an annualized rate (food and energy included) reached 8.6%. Excluding these volatile items from the base, the price increase reached 6%. Clearly, the “peak-inflation-already-behind-us” scenario is losing credibility… And the dread of the Fed – and investors – namely entering into a price-wage spiral n is not an option definitively ruled out.
Verdict tomorrow at 8:00 p.m. (Paris time) for the monetary policy verdict itself and at 8:30 p.m. for a very high-stakes press conference. “The market is now anticipating a 75bp hike in key rates in September, compared to 25bp a week ago! little water in his wine to avoid a too brutal landing still exists”, according to M Giudici. Banks Goldman Sachs and JP Morgan are now also pricing in a 75bp hike in the cost of money.
In terms of statistics on Tuesday, the even lower than expected score of the ZEW index of confidence in the German economy weighs. The index of the same name came out at -28.0 this month. “The economy remains exposed to many risks, such as the effects of the sanctions against Russia, the unclear pandemic situation in China and the gradual change of course in monetary policy. So, although expectations have improved, they are still in negative territory,” commented ZEW President Professor Achim Wambach.
At midday on the foreign exchange market, the Euro was trading against $1.0460 about.
KEY GRAPHIC ELEMENTS
The failure at the contact of the 50-day moving average (in orange) is now recorded, and the bearish targets in the direction of $1.0350 and $1.0250 are locked. A close at the weekly lows reinforced the bearish message.
MEDIUM TERM FORECAST
In view of the key graphic factors that we have mentioned, our opinion is negative in the medium term on the Euro Dollar (EURUSD).
Our entry point is at 1.0457 USD. The price target of our bearish scenario is at 1.0201 USD. To preserve the capital invested, we advise you to position a protective stop at 1.0521 USD.
The expected return of this Forex strategy is 256 pips and the risk of loss is 64 pips.
CHART IN DAILY DATA
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