EUR/USD: The risks of a relapse are real

(News Bulletin 247) – Market psychology unchanged on the Euro/Dollar currency pair on Monday, with a rebalancing of forces in contact with a remarkable moving average, risk appetite remaining restrained by multiple unknowns (consequences of the Zero Covid policy in China, geopolitical impacts on crude oil prices, etc.), and the Dollar remaining supported by the outlook for monetary policy tightening. And this even if the federal employment report for May, published on Friday, did not show any glaring signs of (over)tension…

In detail, this NFP report (for Non Farm Payrolls), highlights 390,000 creations in the private sector, well beyond expectations, but a dynamic monthly increase in wages stable (+0.3% against 0.4% expected), and a stable unemployment rate at 3.6%, while many sectors, particularly in logistics services.

The services PMI in the Euro Zone came out, in final data for the month of May, at 56.1, very close to the initial estimates. The “composite” data, including the industrial component published earlier in the week are therefore available. At 54.8, this data marks an expansion in activity, but which is “starting to lose momentum”.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence comments on the latest figures from the PMI survey: “However, the growth outlook for the coming months seems to be on the decline. Shortages of raw materials indeed continue, worryingly, to limit activity in the manufacturing sector, while businesses and households continue to face soaring costs. The economic rebound linked to the thaw in demand for services after the lifting of health restrictions is also showing signs of losing momentum.

The decline in confidence to one of its lowest levels since the start of the pandemic and the implementation of the first confinements is therefore not surprising, with fewer and fewer companies anticipating an increase in their activity in the next twelve months. The evolution of the economic situation in the region will therefore depend on the ability of the current rebound in demand (which already seems to be easing) to counterbalance the strong headwinds blowing on the economy, namely the geopolitical uncertainty resulting from the war in Ukraine, supply tensions and the rise in the cost of living, which will most certainly be exacerbated by the tightening of monetary policy. The coming months therefore promise to be very difficult for the region and it is for the time being, despite the encouraging pace of growth in the services sector, it is impossible to rule out the possibility of an imminent contraction of the economy. »

If the agenda is almost empty today, in particular because of the public holiday nature of this Whit Monday, in France, Switzerland and Germany, the rest of the week will be dense, with in particular German industrial production on Wednesday, the outcome of the ECB Governing Council on Thursday, and consumer prices in the United States on Friday.

At midday on the foreign exchange market, the Euro was trading against $1.0730 about.

KEY GRAPHIC ELEMENTS

the spot has just fallen below its 50-day moving average (in orange), a bottom trend line with a persistent bearish bias. A daily candle close well below the lower shadow of Tuesday’s candle would further flesh out the bearish scenario. The opinion therefore remains bearish but without a clear sign at this stage of a potential increase in volatility. The stop is clearly identified, just above the weekly highs (week 22) reached on Monday 05/30.

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 1.0727 USD. The price target of our bearish scenario is at 1.0455 USD. To preserve the invested capital, we advise you to position a protective stop at 1.0788 USD.

The expected return of this Forex strategy is 272 pips and the risk of loss is 61 pips.

CHART IN DAILY DATA

©2022 News Bulletin 247