EUR/USD: Towards a continuation of the ebb of the single currency

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The short-term bearish message delivered graphically on the Euro/Dollar currency pair takes shape, as the markets digest the US inflation figures for the month of April.

Hot spot of the statistical calendar yesterday, the CPI (consumer price indices), were published, in a nervous atmosphere. While prices, excluding food and energy (core data) exceeded the target by rising 0.4% in April, the reassuring data comes from 4.9% inflation at an annualized rate, against 5.0%, in the widest product base. Inflation thus stands out “at its lowest”, with the necessary quotation marks, since May 2021. What nevertheless brings certain relief, even though “the latest PCE figures (household consumer price indices), published two weeks ago on the rise and beyond the consensus, had not slowed down the markets”, notes Vincent BOY (IG France).

“But it is too early to claim victory over inflation,” warns William Gerlach, Regional Director France and United Kingdom Iban First. “Indeed, so-called core inflation (“core CPI”) was 0.41% in April and 5.5% over one year. This is still too high. However, this should not force the Fed to raise rates in June.”

The whole point of this market sequence is to refine, for the coming months, the relative trajectories of Fed Funds and key rates in the Euro Zone. “With the Fed appearing to be in ‘pause mode’ as other central banks, notably the ECB, continue to hike rates, this new report is not a game changer.”

“A few months from now, the fall in US inflation will allow real wage inflation to return to positive territory, which should allow consumption to hold up across the Atlantic”, estimates François Rimeu, Strategist at La Française Asset Management, in a market that sends mixed signals.

As such, the publication of the consumer confidence index (U-Mich) on Friday will be essential, and with a strong impact in the event of a significant deviation from the consensus.

“Even if economic growth holds, that does not necessarily mean that all is well for financial assets,” continues the strategist. It must be said that the latest NFP (April’s federal monthly report on private employment) dismisses de facto the risk of a short-term recession, all giving grain to the camp hawkish among Fed executives.

Currency traders’ attention, meanwhile, is focused on the exchanges between Joe Biden and Republican leaders in Congress, in an attempt to agree on the debt ceiling, a condition sine qua non to avoid a new shutdown. This term, which means closure in good French, designates a period of closure of certain federal public services for lack of agreement in Congress on the budget.

To follow, the publication of new inflation indicators, direct (producer price indices) and indirect (registrations for unemployment benefits) in the United States at 2:30 p.m. (Paris time).

At midday on the foreign exchange market, the Euro was trading against $1.0930 approximately.

KEY GRAPHIC ELEMENTS

The identified and fully validated ascending channel exit is accompanied by a triple top structure, which supports our bearish scenario on the flagship currency pair. We are now monitoring the relative momentum of the moving averages, keeping in mind that the price/RSI divergence has already sent a pessimistic 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) parity.

Our entry point is at 1.0930 USD. The price target of our bearish scenario is at 1.0701 USD. To preserve the invested capital, we advise you to position a protective stop at 1.1011 USD.

The expected return of this Forex strategy is 229 pips and the risk of loss is 81 pips.

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