(News Bulletin 247) – The Euro continued its downward bias towards perfect parity with the Dollar on Friday, in very poor soil for risk appetite. “The Euro-dollar could fall below parity in the coming weeks if (1) the price of energy, and especially gas, continues to rise, weighing even more on growth and the Zone’s external accounts, or (2) if the ECB disappoints with regard to its anti-fragmentation tool (the “Transmission Protection Mechanism”) and that the tensions on sovereign debts worsen again”, for the strategists of LBPAM.
In the immediate future, traders have just taken note of the NFP (Non Farm Payrolls) report, the federal employment report for the month of June. Report whose content is rather reassuring in the sense that the Fed’s dread of a runaway price/wage spiral has been postponed for the time being. The American economy has managed to create 372,000 jobs in the private sector (excluding agriculture), well beyond expectations, without unduly racing wages (+0.3%). As for the unemployment rate, it remains stable at 3.6% of the active population, marking almost full employment, on its pre-Covid levels.
The single currency, the benchmark barometer of risk appetite on the markets, continued to suffer from the risks of the main economic poles on both sides of the Atlantic entering recession, and the Dollar failing to to accentuate its gains after Fed Minutes, published on Wednesday evening, which left the door open for a 50 basis point hike in Fed Funds at the end of the month, an option as likely as the 75 basis points on which the market was based.
As a reminder, following the last meeting of the Monetary Policy Committee, the Fed Funds were raised by 75 basis points, a scenario which had been (very partially) digested by the market. “A further 75bp tightening is even still possible in July given the dynamics of medium/long-term inflation expectations”, for Christophe MOREL, Groupama AM, who sees the cost of money at 3.50% at the end of the year.
For their part, [les stratégistes d’ECOFI] forecast[ient] that the Fed will hike rates by 75 basis points (bps) in July, 50 bps in September and 25 bps in November and December. We expect a Fed funds rate of 3.25% / 3.5%, close to the peak of the tightening cycle.” Based on the “three shocks [qui] strike the world: the war in Ukraine [qui] pushes Europe into recession; lockdowns in china [qui] lead to a significant drop in activity; monetary and fiscal tightening in the United States [qui] beginning to weigh on the real estate market, even if prices remain high.
At midday on the foreign exchange market, the Euro was trading against $1.0150 about.
KEY GRAPHIC ELEMENTS
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 1.0152 USD. The price target of our bearish scenario is at 1.0001 USD. To preserve the invested capital, we advise you to position a protective stop at 1.0251 USD.
The expected return of this Forex strategy is 151 pips and the risk of loss is 99 pips.
CHART IN DAILY DATA
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