EUR/USD: Will Christine Lagarde be firm or severe?…

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Big meeting for currency traders this Thursday, with the outcome of a highly anticipated Council of Governors of the European Central Bank. Against a backdrop of a timid slowdown in activity, except in Germany where the brakes are more brutal, the powerful Monetary Institution will have to deliver its verdict on rates. Stop or still?

François Rimeu, senior strategist, La Française Asset Management expects “that the ECB will maintain a less than accommodating tone while keeping rates unchanged. During the press conference, President Lagarde will try to avoid communication” dovish”, making it clear that further tightening is possible. This meeting could lead to a slight steepening of the yield curve.”

Ms. Lagarde must in all cases be firm in her attitude, in her desire to fight until normalization against inflation that is still well above targets. However, “the advisability of an additional rate increase by the ECB given inflation that is still too high is questionable”, judges Emmanuel Auboyneau, Managing Partner of Amplegest.

“The European economy is already suffering, especially in its industrial part, and sectors such as real estate are lastingly affected. The rate shock of the last 18 months is spreading, with the usual delays, in the economy. An additional increase , which could be assimilated to too much increase, would be a clear signal of the ECB’s determination but would probably be badly received by investors. Christine Lagarde will probably try to keep all options open for the future while insisting on the path already accomplished. This rate increase, if it took place, would probably be the last before a long period of stabilization at these high levels.”

See you at 2:15 p.m. for the actual verdict on rates, and for the publication of the ECB’s updated economic forecasts. And at 2:45 p.m. for the press conference.

The Fed, for its part, will complete its FOMC (Monetary Policy Committee) next week, and will have to deal with still very strong tensions on the employment market, despite recent timid signs of relaxation. The American CPIs published yesterday, exceeding expectations, argued for maintaining a firm monetary policy for many months. In annualized data, prices increased by 3.7% (compared to a consensus of 3.6%) on the broadest base of products, i.e. food and energy included.

At midday on the foreign exchange market, the Euro was trading against $1.0730 approximately.

KEY GRAPHIC ELEMENTS

The almost complete retracement of July’s gains does not militate at this stage for a continuation of the advance of the currency pair, without formally excluding it. This retracement, by its magnitude, weakens the bullish message then delivered over a good part of the month of July. The outcome of the ongoing test of the 50-day moving average (in orange) will be decisive. The bearish message takes shape with the break – now validated – of the 50-day moving average by its 20-day counterpart (in dark blue), at a significant angle. The short position will be retained as long as the latter gravitates below the first. The advantage of this investment plan is the discipline that it inherently induces.

MEDIUM TERM FORECAST

Considering the key graphical factors that we have mentioned, our opinion is negative in the medium term on the Euro Dollar (EURUSD).

Our entry point is at 1.0728 USD. The price target for our bearish scenario is at 1.0436 USD. To preserve the invested capital, we advise you to position a protective stop at 1.0831 USD.

The expected profitability of this Forex strategy is 292 pips and the risk of loss is 103 pips.

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