(News Bulletin 247) – The sharp decline in the Euro/Dollar since the second half of last week is a good illustration of both the loss of appetite for risk in a market that is finally taking on the magnitude of the struggle of the big banks against inflation, and the potential “remuneration” of the Dollar, the United States not being immune to entering a wage/price loop.
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. The main equity indices on the other side of the Atlantic slumped, ending at weekly lows.
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).
For Alexandre BARADEZ (IG France), the prices reflect “fears for the world economy, but as these fears stem in particular from inflation, itself fueled by the surge in raw materials, any more substantial decline in raw materials would have bearish on inflation expectations, rates…and therefore would take the aggressive rhetoric of central banks down a notch.” The WTI fell back only very symbolically to $118 a barrel on Monday.
Risk appetite also remained dampened by very disappointing figures on US consumer confidence. Released on Friday, it fell to 50.2 (U-Mich, preliminary data) this month, an all-time low comparable to the recession period of the mid-1980s.
To make matters worse, China, where the vaccination rate remains low, is still struggling with the Covid epidemic, with the threat of a new outbreak in Beijing, just days after a cautious reopening of public places.
At midday on the foreign exchange market, the Euro was trading against $1.0465 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 1.0471 USD. The price target of our bearish scenario is at 1.0251 USD. To preserve the invested capital, we advise you to position a protective stop at 1.0571 USD.
The expected return of this Forex strategy is 220 pips and the risk of loss is 100 pips.
CHART IN DAILY DATA
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