EUR/USD: It’s time for a rebound

(News Bulletin 247) – Between the resolutely bellicose tone of the Fed last week, and activity indicators bringing closer the prospect of a contraction of the economy in the Euro Zone, the single currency had a difficult week, at the image of all risky assets, losing nearly 330 pips against the Dollar, a currency whose safe haven suits it more than ever.

Regarding the PMIs published on Friday (activity indicators calculated after analysis of past surveys of purchasing managers), the “scores” remain significantly below the 50-point mark which separates, by construction, a contraction from an expansion of the sector considered. The disappointment is particularly strong for the services component in Germany alone, at 45.4 in preliminary data for the month of September, completely missing the target. For synthetic data across the Euro Zone, at 48.5 for industry and 48.9 for services, the leading indicator sends a pessimistic message.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, provided the following additional insights: “An economic recession is looming in the Eurozone, with businesses in the region reporting worsening economic conditions and rising inflationary pressures , linked to a surge in the cost of energy. […] It is in Germany that the economic situation has deteriorated most sharply, the rate of contraction having indeed reached (excluding periods of confinement) its highest level since the global financial crisis.

And on Monday, the IFO index of the business climate in Germany came to corroborate this feeling. The barometer indicator for the leading economy in the Euro Zone missed expectations and fell to 84.3 points, the lowest since… March 2020 and the start of the health crisis. The comments accompanying the raw data from the survey are without concession or nuance: “Pessimism about the coming months has increased decidedly; in the retail trade, expectations have fallen to a record low. The German economy is slipping into recession.”

A recession which “will lead to an easing of the constraint on commodity prices as well as on the last remaining bottlenecks. curb an overheating economy. For its part, the ECB, which has adopted a similar posture, is not in a position to counter the current energy shock on its own, but it can nevertheless avoid the diffusion of second-round effects in the European economy. “, believes Romain Aumond (BFT IM).

Finally, despite a quite relative increase in spread Italian following the confirmation of the victory of the coalition around the post-fascist party of Giorgia Meloni, we will not comment further on the implications of the outcome of the general election of the third largest economy in the Euro Zone at this stage, both the consequences on compliance with budgetary rules in particular are still too difficult to estimate.

At midday on the foreign exchange market, the Euro was trading against $0.9650 about.

KEY GRAPHIC ELEMENTS

While volatility has exploded since the last passage below parity, it is precisely the moment of reason to keep and avoid getting carried away by the temptation to reinforce its bearish positions on the currency pair, which can trigger any time the counterintuitive formation of a challenging move, heading towards its remarkable 20-day moving averages (in dark blue) at first.

MEDIUM TERM FORECAST

In view of the key graphic factors that we have mentioned, our opinion is positive in the medium term on the Euro Dollar (EURUSD) parity.

Our entry point is at 0.9642 USD. The price target of our bullish scenario is at 0.9889 USD. To preserve the capital invested, we advise you to position a protective stop at 0.9551 USD.

The expected return of this Forex strategy is 247 pips and the risk of loss is 91 pips.

CHART IN DAILY DATA

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