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The Euro/Dollar suffers from factors that are largely correlated with each other: the restrictive tone, more than anticipated, adopted last week by the Fed, fears about the brutality of the landing of the German economies – this was almost confirmed – but also French, the now chronic firmness of crude prices, long rates (over)heating…
As a reminder, the Fed has, as widely anticipated, left its Fed Funds unchanged, leaving the door open to a further increase. The Fed has made it clear to us that these high rates will constitute a monetary matrix for a long time. And that the terminal Fed Funds, i.e. their high points, have probably not yet been reached.
This firmer than expected tone used by the Institution is justified by a stronger resistance than expected in the American economy after long months of restrictive monetary policy – the forecasts for growth rates and unemployment rates speak for themselves. Furthermore, the famous “dot plots” campaigned for slightly higher rates, for an even larger majority of members, before stabilization. As a reminder, the “dot plots” are a dot graph showing the new key rate projections of Fed members. In short, compared to June, the hawkish camp has clearly gained strength.
In the immediate future, currency traders have just become aware of the IFO business climate index in Germany, which continues to decline, at 85.7 points without falling below the target. The economic cycle clock tool continues its worrying dynamics in the heart of the so-called crisis zone.
On Friday, currency traders had to deal with preliminary data from the Services PMI. The French component, in particular, for the services sector alone, comes out at 43.9, completely missing expectations. The French industrial sector is not left out. “In terms of the weakness of the industrial economy, France is now catching up with Germany,” comments coldly Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank.”
“The PMI index for the French manufacturing sector actually fell back in September, while across the Rhine, the corresponding PMI index recovered somewhat compared to its very low level in August. The services sector, on the other hand, is performing much weaker in France than in Germany, with the activity of German service providers showing signs of stabilization while that of their French counterparts has declined again. This difference may “explained by the importance of the luxury market in France, this sector generally suffering more acutely the effects of an economic slowdown than other services.”
Nomura analysts warn: “Although the eurozone and the UK have avoided recession, weakening recent survey data [en particulier les PMI] led us to recently modify our hypothesis of a recession in the Eurozone and the United Kingdom. With monetary policy now limiting growth, we believe we have reached the peak of the rate cycle for both the ECB and the BoE.
To follow this week the American consumer confidence index (Conference Board) tomorrow, durable goods orders in the United States on Wednesday, the final American quarterly GDP data on Thursday (Q2), and PCE prices on Friday.
At midday on the foreign exchange market, the Euro was trading against $1.0630 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 an important 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 1.0632 USD. The price target for our bearish scenario is at 1.0301 USD. To preserve the invested capital, we advise you to position a protective stop at 1.0731 USD.
The expected profitability of this Forex strategy is 331 pips and the risk of loss is 99 pips.
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