EUR/USD: Let’s put the progression of the OAT/Bund spread into perspective

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The pullback (graphic rejection) on $1.0550 is immediately followed by a decline in the single currency, even as the specter of a period of strong instability in France is gaining ground. The “concessions” made on the budget by Prime Minister M Barnier are not considered sufficient by the leader of the RN in the Assembly, who therefore leaves doubt of a vote on a motion of censure against the government , following the “forceful passage” of the vote, thanks to article 49.3, which could be used this afternoon.

However, a look at the OAT/Bund spread allows Alexandre Baradez (IG France) to put the situation into perspective at this stage. “At just under 90 basis points this Monday morning, we cannot consider the situation as one of panic but rather as a situation of nervousness and vigilance of the financial markets.”

The analyst would like to point out that “in November 2011, during the debt crisis in the euro zone, this spread rose to 190 basis points, that is to say 1.9% difference between the two rate. And for the most fragile countries in the euro zone at the time, like Italy for example, this spread even rose to almost 550 basis points. Worse still, Portugal whose 10-year rate. had deviated by…1550 basis points with the German 10-year, that is to say more than 15% difference without forgetting, finally, the ultimate risk with the difference of…3800 basis points! (!) between the 10-year rates of Greece and Germany in March 2012.’

Let’s zoom out a little, to realize that basically, there is no major change of framework this morning. The economic disconnection of Europe from the United States is increasing, reflected in foreign exchange by a disconnection of the single currency. Christopher Dembik, investment strategy advisor at Pictet AM, recalls that it is “this performance differential between the two sides of the Atlantic which largely explains the recent fall of the euro. No need to look further. Flows fleeing Europe and seeking refuge in the United States favor a structural decline in the EUR/USD.”

Furthermore, the appetite for risk, directly correlated to the single currency, remained upset by Trump’s very recent comments on foreign trade. If we knew the 45th, and soon 47th President of the United States, was offensive on customs tariffs, very concrete declarations of intent shook the Asian and European stock markets.

He wants to impose customs duties of 25% on all products from Mexico and Canada and increase those for products imported from China by 10%. Donald Trump justifies these commercial retaliatory measures in retaliation for illegal immigration, and drug trafficking and in particular Fentayl, a powerful opioid which is wreaking havoc in the United States.

“As everyone knows, thousands of people are streaming through Mexico and Canada, bringing with them crime and drugs at levels never seen before,” he said. “This tariff will remain in effect until drugs, particularly Fentanyl, and all illegal aliens stop invading our country!”, continued the president-elect.

In the immediate future, currency traders have just become aware of the industrial PMI activity barometer in the Euro Zone at 45.2 points, with no difference compared to the first estimates. Remember that a score below 50 points means a contraction in activity. To be followed at 4:00 p.m. the American ISM manufacturing index, expected at 48.8.

At midday on the foreign exchange market, the Euro was trading against $1.0515 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. However, at this stage the decline and the formation of a technical rebound cannot be long in coming, we are watching for the signs.

In the immediate term, the flagship currency pair completes a pullback (graphic rejection) of school on $1.0550.

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 1.0516 USD. The price target for our bearish scenario is at 1.0101 USD. To preserve the invested capital, we advise you to position a protective stop at 1.0676 USD.

The expected profitability of this Forex strategy is 415 pips and the risk of loss is 160 pips.

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