EUR/USD: US producer prices under the microscope of foreign exchange traders

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In a very “academic” way, the Euro/Dollar currency pair was completing a triangle consolidation phase, a phase which immediately followed the surge in prices on August 2, while a federal report on American employment froze the mood on the markets.

“Beyond the subject of central banks, whether it be the Bank of Japan or the Fed, which have clearly contributed to this resurgence of nervousness, it is the theme of the potential slowdown in the American economy that has soared in recent weeks. Firstly in relation to the trend observed in macroeconomic publications, and then on the cautious, even fearful, speech of Jerome Powell during the last Fed press conference”, deciphers Alexandre Baradez, head of market analysis at IG France, who sees a weak signal in the Baltic Dry Index.

“While the Baltic Dry Index had been following a trend line since January, it broke this momentum as stress emerged on global markets.”

“The Baltic Dry Index is a price index for dry bulk shipping, necessarily defined by supply and demand. The progression of this index was rather lateral since the beginning of the year but the intermediate low points on this index were relatively well aligned, thus following a sort of upward “trend line”, the analyst detailed.

As a reminder, manufacturing and employment data published at the beginning of the month (ISM and NFP) had caused a panic movement on the markets at the beginning of last week. These fears had been somewhat tempered by other better-than-expected employment data (unemployment benefit registrations). “All eyes will be on the American statistics this week”, Barclays economists sum up quite well.

Jeanne Asseraf-Bitton, Head of Research and Strategy at BFT IM, imagines a “return to calm after an episode of extreme volatility amplified by the unwinding of carry trade and short positions”. The question that remains is how long this volatility will last. The macroeconomic program can give us some clues.

We will therefore be closely monitoring producer prices on Tuesday, consumer prices on Wednesday, retail sales on Thursday, and consumer confidence (U-Mich) on Friday.

The CME Group’s FedWatch tool now puts the respective probabilities of a 25 or 50 basis point cut in the Fed Funds rate at the end of the Fed’s next monetary policy meeting on September 18th. As a reminder, the valuable tool allows you to analyze the probabilities of changes in federal rates and US monetary policy based on the price of 30-day federal funds futures contracts.

“Central bankers were not idle last week,” notes Romane Ballin, bond manager at Auris Gestion. “Faced with the wave of panic that spread across the markets, they intervened one after another to calm investors. First, we had Mary Daly (president of the San Francisco Fed) who said that an adjustment to monetary policy would happen soon and that there was no need to be alarmed.”

“She also insisted that the job market is slowing down but is not collapsing. The rise in the unemployment rate is, according to her, largely due to an increase in the number of workers, particularly those from immigration, and not to widespread and permanent layoffs.”

As a reminder, the latest NFP (Non Farm Payrolls) report, concerning the month of July, showed a significant increase in the unemployment rate, at 4.3% of the active population, and job creation collapsed, to 114,000.

At midday on the foreign exchange market, the Euro was trading against $1.0925 approximately.

KEY GRAPHIC ELEMENTS

Approximately in the shape of a pennant, the consolidation that took shape on the Euro / Dollar currency pair is ending, in decreasing volatility. The violence of the initial rise invites us to take the measure of an additional bullish potential.

MEDIUM TERM FORECAST

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

Our entry point is at 1.0922 USD. The price target of our bullish scenario is at 1.1143 USD. To preserve the capital invested, we advise you to position a protective stop at 1.0853 USD.

The expected return on this Forex strategy is 221 pips and the risk of loss is 69 pips.

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