EUR/USD: The fall in US rates will be slower than expected

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Against a backdrop of anticipation of an expansionary policy, by nature with an inflationary risk on the part of Donald Trump, the Dollar strengthened further. Especially since J Powell’s tone has hardened somewhat. For its part, the Euro suffered from obvious geopolitical fears and chronic doubts about Germany’s ability to get out of the rut. The ZEW published at the start of the week was worrying in this respect.

The greenback found additional energy after an intervention by J Powell, Chairman of the Fed, during an event organized at the federal branch of the Federal Reserve in Dallas. Based on the very good health of the American economy, he explained that a rapid rate cut was not justified, and that there was no urgency in the ongoing monetary easing process. A tone considered less dovish, if not more hawkish than expected. In the process, and according to the CME Group’s FedWatch tool, the probability of a status quo monetary at the end of the next FOMC jumped to 37.4%. The American 10-year, for its part, continues to simmer in the immediate vicinity of 4.45%.

It is therefore the shape of the downward curve of the remuneration of the Fed Funds which is disrupted. A less steep bearish slope than anticipated is the new working matrix, mechanically unfavorable for the flagship currency pair.

On Thursday, currency traders focused on producer prices in the United States, without any deviation from the consensus on a monthly basis, regardless of the basket of products selected. Furthermore, the low weekly registrations for unemployment benefits, still close to 200,000 new units, show the iron health of American employment, health mechanically with an inflationary tendency. This PPI index contains elements which feed into the PCE inflation index, deemed to be the most favored by the American Federal Reserve (Fed) to gauge price developments in the United States, comments Ipek Ozkardeskaya, Swissquote analyst. Bank, cited by AFP. However, PCE prices are by far THE Fed’s preferred measure in its assessment of price dynamics.

But on an annual basis, producer prices came out very slightly above expectations. “The “problem” is that this latest publication could have consequences on the other inflation measure expected in a few days, that of “core PCE” inflation, the Fed’s preferred inflation measure, which is “that is to say the one it uses in its quarterly projections”, commented Alexandre Baradez (IG France).

As a reminder the day before, currency traders composed with knowledge of consumer prices (CPI) for the month of October. On an annual basis, for the broadest basket of products, the price increase reached 2.6%, i.e. inflation in line with expectations, up significantly compared to September (+2.4%). On a monthly basis, excluding food and energy, the increase reached 0.3%.

A little earlier today, the market took note of the second estimate of gross domestic product in the euro zone, with an increase confirmed at 0.4%. This improvement in the economic situation is “unlikely to be lasting”, however, predicts Capital Economics.

To return to the confidence index in the German economy, mentioned above: “The ZEW (Leibniz Center for European Economic Research in Mannheim) fell significantly in November, in reaction to the election of Trump and the rights “American customs duties which will weigh on the already struggling European manufacturing sector”, noted Nomura strategists. “The gap between the sentiment of Eurozone investors and that of German investors has widened further. We believe that Germany risks being more strongly affected by the American crisis.”

On the macroeconomic agenda this Friday, to follow as a priority, across the Atlantic, retail sales and the “Empire State” index at 2:30 p.m., as well as the monthly report on the industry at 3:15 p.m.

At midday on the foreign exchange market, the Euro was trading against $1.0560 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. Since then, the fragile supports have broken one after the other. Negative review maintained.

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 1.0565 USD. The price target for our bearish scenario is at 1.0239 USD. To preserve the invested capital, we advise you to position a protective stop at 1.0651 USD.

The expected profitability of this Forex strategy is 326 pips and the risk of loss is 86 pips.

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