EUR/USD: Mrs Lagarde to loosen the tap again

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Today is “ECB day” for currency traders… A trivial way of referring to the outcome of the European Central Bank’s Governing Council, a crucial meeting for currency traders.

“Barring a huge surprise, the ECB should proceed with its second rate cut after that of June, and it has a “favorable” context to do so,” notes Alexandre Baradez (IG France), who lists “overall inflation in the euro zone […] “the medium-term inflation expectation in the euro zone (5Y5Y) fell to 2.2%, its lowest level since July 2021″ […] is now moving below 2.10%, the lowest level observed since October 2022”, “the sluggish growth of the eurozone compared to American growth”, or even “the fall in investor sentiment in the zone in September to an 8-month low”.

The dynamics of employment, the difficult situation facing the German economy, the trajectory of prices, will all be subjects analyzed and linked together, both in the press release accompanying the monetary policy decision (2:15 p.m.), and in the subsequent press conference (2:45 p.m.).

“With wage growth having started to slow, this trend is likely to continue due to weak activity,” says Patrick Barbe, head of investment grade fixed income in Europe at Neuberger Berman. “Furthermore, after the tourist season and rising utility costs in the first half of the year, core inflation is likely to start to decline again from September and fall below 2.5%. In such a scenario, the ECB is likely to cut again in October.”

Yesterday, traders took note of the consumer price indices across the Atlantic for the month of August, whose dynamics increased by 0.3% excluding food and energy, against a target of +0.2%. No surprises, however, regarding prices in the broadest product range, which slowed very markedly on an annual basis, to +2.5%, in line with expectations. Enough to leave the door open to a first federal rate cut of 50 basis points on September 18. This scenario is estimated at a 17% probability of realization according to the CME Group’s FedWatch tool, compared to 83% for a first cut of 25 basis points.

These figures lend credence to a 25 basis point (0.25 percentage point) cut in the Fed’s key rates, with the market currently assessing the probability of such a scenario at 85% versus 66% the day before, according to the CME FedWatch tool. The Fed will conclude its FOMC on September 18. In the immediate future, traders will be able to see producer prices at 2:30 p.m., the dynamics of which constitute a leading indicator of inflation.

At midday on the foreign exchange market, the Euro was trading against $1,1020 approximately.

KEY GRAPHIC ELEMENTS

A pattern (pattern) chart shoulder, head and shoulders, on a slanting neckline basis, is emerging, even as the relative strength RSI indicator sends negative messages.

MEDIUM TERM FORECAST

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

Our entry point is at 1.1018 USD. The price target of our bearish scenario is at 1.0759 USD. To preserve the capital invested, we advise you to position a protective stop at 1.1121 USD.

The expected return on this Forex strategy is 259 pips and the risk of loss is 103 pips.

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