EUR/USD: Towards a continuation of the decline

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At the heart of the past week, the Euro accentuated its short-term bearish bias against the Dollar, against a backdrop of anticipation of an acceleration in the rate of reduction of key rates, in a Europe relieved by the “control of the ‘inflation’, but worried about the health of German industry, the situation of French public finances and generally, the state of the economy of the monetary union.

Unanimously by Governors, the European Central Bank decided to lower its main key rate by 25 basis points.

This is the third reduction in its key rates this year, after the one decided in June, followed by another in September. It is justified by the slowdown in inflation in the euro zone.

“It’s done. The European Central Bank (ECB) has lowered its key rate by 25 basis points. Unfortunately, there was no internal debate within the governing council on the desirability of a reduction more important”, commented Christopher Dembik, investment strategy advisor at Pictet AM

“Historically, countries close to the German approach have always had a dominant voice within the institution.” This has resulted in significant weight being given in decisions to weak signals that could indicate inflationary pressures. Thus, two weeks ago, the Slovenian governor publicly questioned the advisability of a rate cut in October, worrying about a possible price-wage loop which has not materialized since the start of the year.

“The good news is that perhaps this will change. We are facing a radical economic inversion within the euro zone which could have a long-term effect on the institutional functioning of the ECB. The countries of the South of Europe – the former Club Med – are now the economic engine of the area.

Currency traders, who will be deprived of sharp macroeconomic benchmarks this Monday, will have plenty to do throughout the week, however, with in particular barometer indicators of activity on Thursday, and the IFO business climate index in Germany on Thursday.

At midday on the foreign exchange market, the Euro was trading against $1.0850 approximately.

KEY GRAPHIC ELEMENTS

The oblique support line (drawn in black) has given way in a significant and increasing level of volatility. The 50-day moving average (in orange) also gave way quickly, the bearish message is reinforced. Next graphic event to watch, the ongoing crossing of two remarkable moving averages, at 20 and 50 days. The crossing angle is important, in light of the current correction.

MEDIUM TERM FORECAST

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

Our entry point is at 1.0851 USD. The price target for our bearish scenario is at 1.0551 USD. To preserve the invested capital, we advise you to position a protective stop at 1.0971 USD.

The expected profitability of this Forex strategy is 300 pips and the risk of loss is 120 pips.

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