EUR/USD: At 8:00 p.m., THE meeting place for currency traders

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Here we are! The Fed will lower key rates this Wednesday, that is almost certain. But to what extent? Hit hard at the beginning of the cycle, or initiate this easing process with flexibility: that is the challenge of this FOMC, which will be accompanied, as every quarter, by valuable indications: the new economic projections and the dot plots.

“Finally!” Christopher Dembik, investment strategy advisor at Pictet AM, also impatiently says. “The Fed will begin its monetary easing cycle this Wednesday. But not everyone agrees on the extent of the first rate cut. On the one hand, there are the pessimists who see the American economy on the brink of recession and are arguing in favor of a 50 basis point cut. On the other hand, there are the realists, of which we are one, who consider that the American economy is doing well.”

“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 bps cut in Fed Funds rates at 63%, down from 67% yesterday.

This rebalancing is evidence of uncertainty. “Market uncertainty about the Fed’s decision is the highest in over 15 years,” observed Xavier Chapard, strategist at LBPAM, on Wednesday morning. As a corollary to this significant uncertainty, the market has a good chance of being surprised, in one direction or another.

“The market is anticipating a 40 basis point (0.4 percentage point) rate cut, which is a probability of only slightly above 50% of a 50 basis point cut, rather than 25 basis points. So the surprise will be more than 10 basis points, down or up, on short-term rates in the coming days. The Fed had guided market expectations better even when it raised its rates by 75 basis points four times in a row in 2022,” Xavier Chapard dissects.

The Fed and Jerome Powell will therefore be walking on eggshells tonight. “Poor communication could increase risk aversion on the markets, despite a larger rate cut than expected,” warns Xavier Chapard. This would be penalizing first and foremost for the Euro, the benchmark barometer of risk appetite on the financial markets.

On Tuesday, in the statistical chapter, operators took note yesterday 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.

Across the Atlantic, if we exclude automobiles from the basket, retail sales in the United States fell by 0.1% over one month in August, missing an optimistic target of +0.2%. As for the monthly federal report on American industry, it is very satisfactory, both in terms of production (+0.8%) and that of the use of productive capacities (78%).

So, forex traders, see you at 8:00 p.m. for the monetary policy decision itself, the dot plots and the updated economic projections, then at 8:30 p.m. for the press conference.

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 negative in the medium term on the Euro Dollar parity (EURUSD).

Our entry point is at 1.1139 USD. The price target of our bearish scenario is at 1.0801 USD. To preserve the capital invested, we advise you to position a protective stop at 1.1201 USD.

The expected return on this Forex strategy is 338 pips and the risk of loss is 62 pips.

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