EUR/USD: The Euro is putting Trump’s expansionist policy to the test

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Although in slight decline close to 4.30%, the yield on American government bonds with a 10-year maturity remained particularly firm, a direct consequence of expectations of an expansionist and potentially inflationary policy on the part of Donald Trump, upon taking office at the White House on January 20.

“Lower fiscal policy, stronger economic growth and higher consumer prices in the event of significant tariffs would likely force the US Federal Reserve (Fed) to limit monetary policy easing relative to initial expectations “, warns Dr. Felix Schmidt – senior economist and Dr. Holger Schmieding – chief economist at Berenberg. “It would therefore be possible that the Fed only lowers its key rate twice in total this quarter and next quarter, instead of four, by 25 basis points each time. In this case, the range of key rates at the end of the easing cycle would be 4.25% to 4.5% instead of the 3.75% to 4.0% currently planned.”

The Fed, in fact, yesterday concluded a new meeting of the Monetary Policy Committee, with the name of the next President of the United States in mind. The Federal Reserve led by J Powell unsurprisingly decided to lower the yields of its Fed Funds by 25 basis points.

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

Because if inflation expectations are to be revised upwards, it is the anticipation of the shape of the rate trajectory which is mechanically modified.

“Inflation expectations and, in particular, real yields have increased since the Fed began lowering rates in September,” said William Zox, Portfolio Manager, Brandywine Global (a subsidiary of Franklin Templeton), who does not think not that “the Fed will cut rates in December or January, but [qu’] It will be up to the Treasury market to convey that message to the Fed, rather than the other way around.”

Statistically yesterday, weekly registrations for unemployment benefits stood at 221,000 new units, very close to the consensus, and synonymous with chronic firmness in employment across the Atlantic. A dial that the Fed consults very regularly. On the macroeconomic agenda this Friday, priority should be given to preliminary data from the consumer confidence index (U-Mich) at 4:00 p.m.

On the European side, finally, the end of the coalition in Germany is an element to take into account, potentially positive in the short term for the DAX, but less readable for the single currency.

“We believe that the prospect of a change in government should not cause yields to rise, as additional spending could be expected. Over the next 12 months, we continue to expect German government bond yields to fall and a slight steepening of the yield curve”, deciphers the Chief Investment Officer of DWS, a German asset manager.

At midday on the foreign exchange market, the Euro was trading against $1.0770 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 1.0772 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 401 pips and the risk of loss is 135 pips.

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