EUR/USD: Four increases in Fed Funds this year?

(News Bulletin 247) – Between two major monetary meetings (ECB Board of Governors last week and the Fed’s FOMC Monetary Policy Committee this week), the Euro continues to suffer from a marked downward bias, while seeing the forces present rebalance in the very short term around $1.1000.

The European Central Bank (ECB) yesterday ended a new meeting of its Board of Governors. By deciding, creating the surprise, to accelerate its program of asset purchases, Ms. Lagarde reopened the way for a possible rate hike by the end of the current year, which had previously come out of the universe of possibilities.

“Faced with such a powerful external inflationary shock, the monetary response does not seem to be the best suited,” analyzes Ronan Blanc (Manager Analyst at Financière Arbevel). “After its 180° turn last month, we expected a little more readability in a particularly anxiety-provoking context. Uncomfortable, the ECB is no longer in control of time. It estimated that the situation on the bond market was not comparable to that of the first days of the pandemic and therefore did not require support from her. Let’s hope that investors do not take her at her word by testing her intentions to intervene.”

“While the eventual exit from negative rates in Europe may seem inevitable, the timing of these announcements raises questions. The path to normalization is therefore now open, but the institution is not commenting on any timetable. It is therefore taking the path of the Fed without having too much means (nor the need?). Let’s hope she won’t regret it.”

Difficult equation also on the American side, with a Fed which completes a new FOMC on Wednesday, March 16, at the end of which the scenario of a 25 basis point increase in Fed Funds is anticipated. “The challenge of the meeting is above all to know how many rate hikes there will be this year. This will have an influence both on economic developments (through the credit relay, among others) and on the evolution dollar pairs, such as EUR/USD”, comments William Gerlach, France Director of iBanFirst.

“Last December, the central scenario was based on three rate hikes in 2022. The interest rate would then rise to 0.9%. Then it would increase to 1.6% in 2023 with two additional rate hikes. long term, it would be increased to 2.5%.If the central bank considers that the priority is to fight inflation, which is certainly the case following the surge observed in January and February, it is not not rule out that we end up with a central scenario with four rate hikes this year.

No statistical indicator capable of significantly varying the currency pair is on the agenda today. On the other hand, it will become very dense as of tomorrow with in particular the German ZEW, the producer price index and the Empire State index in the United States.

At midday on the foreign exchange market, the Euro was trading against $1.0975 about.

KEY GRAPHIC ELEMENTS

The transition phase between February 4 and 23, in the form of a slip without federation, under the 100-day moving average (in orange) is over. The underlying bearish bias aligns with the short term, and the plot of a candle conspicuous by its red body on Thursday 2/24 illustrates the firm grip of the selling side. With 6 red bodied candles over the last 6 candles, the last one still being drawn, and continued selling mobilization over the past week, the picture remains gloomy. We are reviewing our bearish targets, at $1.0685, then if necessary at $1.0454.

MEDIUM TERM FORECAST

In view of the key graphic factors that we have mentioned, our opinion is negative in the medium term on the Euro Dollar (EURUSD).

Our entry point is at 1.0968 USD. The price target of our bearish scenario is at 1.0455 USD. To preserve the invested capital, we advise you to position a protective stop at 1.1081 USD.

The expected return of this Forex strategy is 513 pips and the risk of loss is 113 pips.

CHART IN DAILY DATA

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