EUR/USD: A barometer of risk appetite

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The Euro remained in a short-term downward trend against the Dollar, in a nervous market across all risky asset classes.

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,” said William Gerlach, Regional Director France. and UK Iban First.

Juliette Cohen, CPR AM Strategist, explains this discrepancy in monetary processes between the Fed and the ECB.

“The Fed started its cycle of rate hikes in March 2022 and raised its key rates by 500 bps. Barring any surprises on future inflation data, it should not raise its rates any further. the tightening of credit conditions, which was already at work with the bank failures of March and April.

The ECB should, for its part, continue its monetary tightening until July and again raise its rates twice by 25 bp. In its decision-making, it will focus on three factors in particular: the outlook for inflation, the dynamics of underlying inflation and the speed with which rate increases are dampening the economy and bringing inflation down. “

Risk appetite, to which the flagship currency pair is particularly sensitive, depends on the outcome of discussions in Congress around raising the US debt ceiling. As a reminder, in the absence of an agreement, the country would enter a new period of shutdown (closure), during which certain federal public services would be stopped. “On Tuesday, President Joe Biden is expected to receive members of Congress to discuss the US debt ceiling, following the postponement of the meeting, which should take place at the end of last week. Janet Yellen still sees June 1 as the date on which the United States will no longer be able to finance the functioning of the State, if the debt ceiling is not raised”, notes Vincent Boy, market analyst IG France.

The dynamics of retail sales will be scrutinized tomorrow, especially since on Friday operators had to digest the very disappointing preliminary data from the consumer confidence index, as defined by the University of Michigan (U-Mich index ). In the immediate term, the Empire State manufacturing index collapsed to -31.8, completely missing the expectations of the trading rooms. The index, which has been very volatile since the start of the year, is at its lowest since January.

At midday on the foreign exchange market, the Euro was trading against $1.0875 approximately.

KEY GRAPHIC ELEMENTS

The identified and fully validated ascending channel exit is accompanied by a triple top structure (04/14, 04/26, 05/04)*, 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.

* We will appreciate on each of these dates the high shadows of the corresponding candles.

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 1.0875 USD. The price target of our bearish scenario is at 1.0551 USD. To preserve the invested capital, we advise you to position a protective stop at 1.0976 USD.

The expected return of this Forex strategy is 324 pips and the risk of loss is 101 pips.

CHART IN DAILY DATA