EUR/USD: Scissors effect on the single currency

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Today marks the end of a new meeting of the Fed Monetary Policy Committee (FOMC), with one certainty for American central bankers: the name of the next tenant of the White House, Donald Trump, whose victory has could have been definitively proclaimed yesterday, while the polls suggested long counts, tallies and recounts of votes in key states… The Fed will therefore have to deal with a Republican, certainly, but with radical positions, particularly in terms of the budget and taxation. His program, in favor of massive tax cuts for companies and households, is considered inflationary.

“The recent moderation of inflation bodes well as economic growth shows resilience despite a decline in employment. But the election of Donald Trump makes the future of operations more uncertain, knowing that he appeared to be the candidate favoring growth and inflation”, judges Emmanuel Auboyneau, Managing Partner at Amplegest.

Already quivering before the elections, the American 10-year continued to heat up, now at 4.45%, mechanically favoring the Dollar.

“Trump’s potentially expansionary economic policy could encourage the Fed to adopt an even more restrictive posture to counter inflation,” says Andrea Tueni, Head of Sales Trading at the Saxo Banque France office.

It is therefore the pace of reduction in federal rates that could be called into question. It is this downward trajectory, probably slower, which will be scrutinized at the Fed’s next meetings. For this meeting in general, a reduction of 25 basis points in the Fed Funds is widely anticipated.

Radically, “one of Trump’s recent proposals consists of ‘abolishing taxes and replacing federal revenues with customs tariffs'”, notes Grégoire KOUNOWSKI Investment Advisor at Norman K. “Although difficult to achieve, this measure reflects a desire to pursue an expansionary and protectionist monetary and fiscal policy. This would lead to inflationary pressure, thereby pushing up rates (both in the short and long term), while strengthening the value of the dollar.

Furthermore, the geopolitical fog is now thickening, on several fronts, during the transitional period before taking office on January 20, which may weigh on the appetite for risk, and therefore on the Euro, trapped by a “scissors effect”.

To follow, on the agenda this Thursday, the weekly registrations for unemployment benefits across the Atlantic at 2:30 p.m., the Fed’s decision at 8:00 p.m., followed by the traditional press conference at 8:30 p.m.

At midday on the foreign exchange market, the Euro was trading against $1.0760 approximately.

KEY GRAPHIC ELEMENTS

The currency pair has just come out from the bottom, in intense volatilityof a wedge pattern, which confirms the bearish bias, which is now fundamental.

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 1.0758 USD. The price target for our bearish scenario is at 1.0371 USD. To preserve the invested capital, we advise you to position a protective stop at 1.0907 USD.

The expected profitability of this Forex strategy is 387 pips and the risk of loss is 149 pips.

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