EUR/USD: J.Powell begins the turn, C. Lagarde stays on his line

(News Bulletin 247) – The Euro, which has been holding up a little since the publication of an excellent German ZEW on Tuesday, remains under pressure from a monetary turn that could be tighter than expected from the from the Fed. Next appointment to tick on this subject on the agendas of forex traders: the FOMC in January, which will end next Wednesday. However, the powerful monetary institution should not tighten the monetary tap by direct action on federal rates before March.

While the scenario of three episodes of federal rate hikes over the year 2022 seems certain, since the particularly firm tone of the last Minutes, report of the December FOMC, a scenario with 4 hikes is not excluded. The boss of JP Morgan expects the realization of this scenario: Jamie Dimon anticipates that inflation will remain well above the Fed’s 2% target in 2022 and therefore bets on more than 4 rate hikes from the central bank this year, which will lead to more volatility.

“It is therefore a much faster normalization of monetary policy than the previous one that will take place in the coming months. And the American markets have started to integrate this development since the beginning of the month with a rebound in rates”, synthesizes Alexandre Baradez, for IG France, who does not forget to mention the central role of China in the process of pressure on rates.

“Disruptions in the global supply chain, part of which is attributable to China, have the effect of perpetuating supply difficulties and therefore maintaining upward pressure on prices, which forces central banks, and especially the Fed, to beef up its rhetoric.”

While faced with equally strong inflation on this side of the Atlantic, “the ECB should gradually adopt a less friendly attitude and bond rates are very likely to rise again”, for Frédéric Rollin, investment strategy advisor at Pictet AM, it is indeed the aggressiveness differential between the two major central banks that will drive the currency pair. And for now, hostilities are stronger on the Fed side.

Ms. Largarde, questioned this morning on France Inter, wanted to be reassuring, indicating once again that a change in monetary policy was not to be expected in the short term. “We consider that during the year 2022, [les prix] will stabilize and gradually decline over the course of the year,” she said, adding that this decline is expected to continue in 2023 and 2024.

In terms of statistics yesterday, there was very little to eat, apart from housing starts and building permits, which both exceeded expectations for the month of December.

At midday on the foreign exchange market, the Euro was trading against 1,1350$ about.

KEY GRAPHIC ELEMENTS

We warned in our previous analyzes on the flagship currency pair against the “risk” of a false exit from above, an elongated wedge pattern. We are there, and the expression of this false exit abruptly brought the spot back against a 100-day moving average (in orange) with a sharp bearish bias. Traders will be able to gradually resume short positions on the EURUSD spot by taking advantage of a much better quality entry point.

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 1.1346 USD. The price target of our bearish scenario is at 1.1151 USD. To preserve the capital invested, we advise you to position a protective stop at 1.1431 USD.

The expected return of this Forex strategy is 195 pips and the risk of loss is 85 pips.

CHART IN DAILY DATA

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