EUR/USD: Trend is your friend, the trend is a precious ally

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Dollar and crude oil rose together, while the Euro and appetite for risk contracted together… A market matrix on foreign exchange which is now well established, and which leaves the Euro / Dollar currency pair, bearish in a way straight since mid-July, a potential for additional decline.

The bond context, marked by firm long-term rates on both sides of the Atlantic, is essential in the thinking of currency traders. In particular, the American 10-year is moving forward again after a very short consolidation, now above 4.64. The scenario of high Fed Funds (or even a little higher) for a long time is now recognized by the market, particularly after a particularly firm Monetary Policy Committee last week. The FedWatch CME tool predicts a status quo of Fed Funds at 77.6% probability for the November FOMC, and an increase of 25 basis points at 22.4% probability. Not negligible, therefore.

Neel Kashkari, president of the Minneapolis Federal Reserve, declared on CNBC that he could not assure that the Fed Funds had reached their peak, recalling the objective of 2% inflation.

In terms of statistics, tomorrow’s publication of the PCE prices will undoubtedly constitute the highlight of the week. As a reminder, this measure (Personal Consumption Expenditures) is the Fed’s preferred indicator in its assessment of inflation. These prices, stripped of volatile elements, are expected to increase monthly by 0.2% for the month of August. To be followed this Thursday, as a priority for the United States, the final Q2 GDP data and weekly registrations for unemployment benefits, at 2:30 p.m. Yesterday, currency traders learned on Wednesday of durable goods orders for the month of August, up monthly by 0.4%, beating the consensus (+0.2%).

At midday on the foreign exchange market, the Euro was trading against $1.0530 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 took 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 latter, precisely, increasingly plays a graphic role of resistance.

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 1.0527 USD. The price target for our bearish scenario is at 1.0239 USD. To preserve the invested capital, we advise you to position a protective stop at 1.0641 USD.

The expected profitability of this Forex strategy is 288 pips and the risk of loss is 114 pips.

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