EUR/USD: Euro regains the advantage

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The end of the short consolidation on the Euro / Dollar (August 06 – 09) was classically followed by a rise in increasing volatility, giving more credit to the support role of the 20-day moving average (in dark blue). The prospect of a 50 basis point cut in the remuneration of the Fed Funds in September is gradually taking shape, suggesting a differential in remuneration between the two currencies in favor of the single currency, at least for a while.

This scenario now has a 52.5% chance of happening according to the CME Group’s FedWatch tool, compared to 50% yesterday. Knowing that the other option considered is not a status quo on rates, but also a decrease of 25 basis points.

Currency traders took note yesterday of producer prices, which are an excellent barometer of inflation, before the publication this Wednesday of retail prices (consumer prices) for the month of July. The wholesale price index in fact rose by 0.1% in July, which is lower than the market consensus which was counting on an increase of 0.2%. Year-on-year, producer prices rose by 2.2% last month, against an increase of 2.7% in June.

“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.

This rise in the Euro only reveals the weakness of the Dollar in the background. Because on the single currency side, bullish arguments are intrinsically lacking. Yesterday, currency traders took note of the ZEW index of confidence in the German economy, which was in free fall to 19.2, compared to 41.8 the previous month. ‘Germany’s economic outlook is collapsing,’ declared the president of the ZEW, Professor Achim Wambach, PhD.

“In the current investigation [sur le moral des investisseurs]we are seeing the sharpest decline in economic expectations in the past two years. Economic expectations for the euro area, the US and China are also clearly deteriorating. As a result, expectations for export-intensive German sectors in particular are declining. Economic expectations are likely to remain affected by high uncertainty, fuelled by ambiguous monetary policy, disappointing trade data from the US economy and growing concerns about an escalation of the conflict in the Middle East. More recently, this uncertainty has translated into turbulence on international stock markets.”

On the agenda this Wednesday, to follow in priority the consumer prices in the United States at 2:30 p.m. The CPI, for the month of July, excluding food and energy, are expected to increase by 0.2% on a monthly basis.

At midday on the foreign exchange market, the Euro was trading against $1,1025.

KEY GRAPHIC ELEMENTS

The end of the short consolidation on the Euro / Dollar (August 06 – 09) was classically followed by a rise in increasing volatility, giving more credit to the support role of the 20-day moving average (in dark blue).

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 1.1028 USD. The price target of our bullish scenario is at 1.1249 USD. To preserve the capital invested, we advise you to position a protective stop at 1.0949 USD.

The expected return on this Forex strategy is 221 pips and the risk of loss is 79 pips.

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