EUR/USD: The disinflation process is not a long, quiet river

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The Dollar saw its volatility suddenly accelerate against the Euro, just after the publication of American inflation on Tuesday afternoon. The greenback, which sees its “yield” promised to remain high for a good part of the year, gained a few pips against a Euro which further materializes the beginnings of risk aversion.

In detail, prices across the Atlantic, food and energy included, increased at an annual rate of 3.1%, i.e. a much less significant slowdown in inflation than the target, at 2.9%, suggested. Enough to further reduce hopes of cumulative declines in Fed Funds yields over the year 2024. The firmness (understanding the persistent tensions) on the job market, as well as the thorny issue of rents (they are part of the calculation methodology) largely explain these worrying figures.

So-called core inflation, which excludes volatile food and energy prices, remains stable at 3.9% over one year, where the consensus compiled by the Wal Street Journal also counted on a weaker progression, of 3.7%.

For Joshua Jamner, analyst at ClearBridge Investments, a subsidiary of Franklin Templeton, this publication definitively closed the door to a rate cut in March “and will likely lead to a new debate around a “no landing” or overheating scenario. The process of disinflation is not a straight line, however, and a single isolated outcome after a long string of more favorable releases does not represent a new trend. Fed funds futures now price in less than 50% probability of a rate cut in May, with the first cut fully priced in June and a total of 3.8 cuts in 2024.”

Yesterday another statistical highlight, the ZEW index of confidence in the German economy rose higher than expected, at 19.9 points. On the other hand, the assessment of the economic situation in Germany has deteriorated considerably. The corresponding indicator lost 4.4 points and now stands at minus 81.7 points.

“The German economy is in a bad way. Respondents’ assessment of the current economic situation has deteriorated to its lowest level since June 2020. In contrast, economic expectations for Germany have improved again. As a result, more than two-thirds of respondents expect the ECB to cut interest rates over the next six months, given falling inflation rates. three-quarters of respondents expect an imminent interest rate cut from the US central bank,” comments ZEW President Professor Achim Wambach on the survey results.

No surprises this morning regarding the first estimates of Q4 GDP in the Euro Zone, stable from one quarter to the next, perfectly in line with expectations.

To be monitored at 4:30 p.m. crude oil stocks in the United States.

At midday on the foreign exchange market, the Euro was trading against $1.0700 approximately.

KEY GRAPHIC ELEMENTS

The graphical and technical situation is trending below the 20-day moving average (in dark blue). However, the angle of attack is not very important. This trend line, which is accelerating downward, will conveniently serve as a trailing stop. In the immediate future, the acceleration in volatility reassures us in this graphic scenario.

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 1.0702 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 1.0811 USD.

The expected profitability of this Forex strategy is 266 pips and the risk of loss is 109 pips.

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