EUR/USD: European industrial activity in a gloomy mood

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Certainly the rather reassuring data on price dynamics, published at the end of last week on both sides of the Atlantic, were likely to calm the surge in long-term rates, and therefore to slow down the erosion of the most risky assets. . But it is clear that this effect is short-lived. Already the Euro/Dollar currency pair is back in the red this Monday, putting an end to a very short rebound of protest, still below a merciless short moving average.

According to the latest EuroStat data, across the Euro Zone as a whole, prices adjusted for volatile elements are now showing an annualized increase of 4.5%, compared to a more pessimistic target of 4.8%. Enough to bring a feeling of relief, and enough to advance the idea that the terminal European rates may already be reached. “As for the main components of euro zone inflation, food, alcohol & tobacco are expected to see the highest annual rate in September (8.8%, compared to 9.7% in August), followed by services (4.7%, compared to 5.5% in August), industrial goods excluding energy (4.2%, compared to 4.7% in August) and energy (-4.7%, compared to -3.3% in August), adds the pan-European statistical institute.

On the other side of the Atlantic, the basic “core PCE” inflation index, for personal consumption expenditures, the Fed’s favorite index in its assessment of price dynamics, increased by only 0.1% over one month after +0.2% in July. The consensus expected a stable pace of +0.2%. In the process, the American 10 began to consolidate, however remaining well above the 4.50 mark. Still not enough, at this stage, to erase the minority but significant probabilities of an increase in Fed Funds from the November FOMC. Worse, an impression of vagueness could emerge from the next debates between members of the Federal Reserve, at the risk of instilling a feeling of insecurity.

Furthermore, the agreement reached at the last minute to avoid the “shutdown” is in no way sufficient to boost risky assets. A last-minute agreement between Democrats and Republicans made it possible to avoid a shutdown of American federal services due to lack of funding, even though it only postponed the deadline by 45 days. “On a practical level, the Congressional agreement, as fragile as it may be, prevents us from being deprived of statistics coming from the Departments of Commerce and Labor, which would have put the Fed and the markets in the fog,” note the economists from Oddo BHF.

In the immediate future, currency traders have just become aware of industrial PMI activity indicators whose messages come out divergent, a little better than expected in France, a little less good in Germany. But in the end, at the scale of the Euro Zone, the score, of 43.4, is in line with the first estimates.

Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, provided the following insights: “Among the four main economies of the Eurozone, France and Germany recorded the largest contractions in September, Spain and Italy showed slightly less negative performances. However, if we take into account the duration of the current slowdown, as indicated by official data on industrial production, this is the Italy which recorded the weakest performance, its manufacturing sector having been in recession since the second half of 2022. Germany is in second place, its industrial sector having entered into recession in the second quarter of this year. It is still too early to talk about technical recession in France and Spain.”

To be continued on the American side, we will focus on the industrial PMI at 4:00 p.m. and a speech from J Powell at 5:00 p.m.

At midday on the foreign exchange market, the Euro was trading against $1.0540 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 1.0541 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 1.0671 USD.

The expected profitability of this Forex strategy is 302 pips and the risk of loss is 130 pips.

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