EUR/USD: -25 or -50 basis points? Fed your games!

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The Euro was balancing against the Dollar on the eve of the outcome of a historic Fed Monetary Policy Committee meeting, at around $1.1130 per Euro.

Historic in the sense that it will formally mark the beginning of the decline in federal rates. The Fed – this is a given unless there is a huge surprise – will therefore lower the remuneration of its Fed Funds. Yes, but to what extent? -50 basis points to clearly mark the occasion, before adopting a more flexible trajectory? Or -25 basis points, at the risk of disappointing part of the market? Verdict on Wednesday at 8:00 p.m. for the monetary policy decision itself, the new economic projections and the dot plots, and at 8:30 p.m. for the press conference.

“The question is no longer whether the FED will take action but rather to estimate how quickly this new monetary cycle will unfold against a backdrop of macroeconomic data suggesting a slowdown in the labor market and a slight deceleration in the economy,” according to Grégoire KOUNOWSKI, Investment Advisor at Norman K.

“On the one hand, there are the pessimists who see the US economy on the brink of recession and are arguing for a 50 basis point cut. On the other hand, there are the realists, of which we are one, who believe that the US economy is doing well. A 50 basis point cut would be surprising,” says Christopher Dembik, investment strategy advisor at Pictet AM.

Hitting hard at the start of the cycle, or flexibly starting the easing process: this is the challenge of this FOMC, which will be accompanied, as every quarter, by valuable indications: the new economic projections and the dot plots.

“Bill Dudley wants the Fed to hit hard at the start of the rate cut cycle,” notes Alexandre Baradez (IG France). “The former president of the New York Fed” believes that “a 50 basis point cut would fit well with the next set of economic projections from Fed officials, which they will publish this week. Markets expect a total cut of at least 100 basis points by the end of 2024. If the Fed only does 25 now and plans an additional 50 at one of its next two meetings this year, it will send a “hawkish” signal.”

The CME Group’s FedWatch tool puts the probability of a 50 basis point cut in Fed Funds rates at 67%.

In the statistical chapter yesterday, traders learned of an overshoot of the target for the monthly surplus of the trade balance in the Eurozone, at +15.5 billion euros in July, against +17.0 billion euros in June. Published this Monday, the manufacturing index of the Fed of NY (Empire State Index) largely beat expectations, returning clearly to positive territory, at 11.5.

They have just learned this morning of the ZEW index of confidence in the German economy, the first in the European Union, but faltering on the industrial level, its historical strong point. The index came out in free fall at 3.6 points.

“The hope for a rapid improvement in the economic situation is visibly fading. In the latest survey, we are once again seeing a noticeable decline in economic expectations for Germany. The number of optimists and pessimists is now balanced. Although the decline in economic expectations for the eurozone suggests an overall increase in pessimism, the decline in expectations for Germany is significantly greater. Most respondents seem to have already factored the ECB’s interest rate decision into their expectations,” comments ZEW President Professor Achim Wambach.

To follow, across the Atlantic, retail sales at 2:30 p.m. and the federal report on industry (production volume and rate of utilization of productive capacities) at 3:15 p.m.

At midday on the foreign exchange market, the Euro was trading against $1,1130 approximately.

KEY GRAPHIC ELEMENTS

The Euro/Dollar currency pair, in the form of a very clear pullback (graphic rejection), has returned to contact with an oblique line (in black) which materializes the neckline of a bearish shoulder, head and shoulders pattern. Bearish positions will be reactivated as soon as the spot below this graphic level.

MEDIUM TERM FORECAST

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

We will maintain this neutral opinion as long as the Euro Dollar (EURUSD) parity rates are positioned between the support at 1.1012 USD and the resistance at 1.1250 USD.

DAILY DATA CHART