EUR/USD: Bearish target maintained after the ECB

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“A fourth consecutive drop in 2024 and a loosening of rates which should continue next year,” notes Grégoire KOUNOWSKI, Investment Advisor at Norman K. “Since the American presidential elections and the publication, in parallel, of poor economic indicators in the euro zone, the markets were pleading for a reduction in order to stimulate the economy of the Old Continent.”

The scenario of a drop of 50 basis points, which without holding the rope was part of the universe of possibilities, was therefore ruled out. This probability had in any case clearly “fallen due in particular to moderate statements by members of the ECB, including Isabel Schnabel, indicating that the measures taken by the central bank do not resolve the structural problems. “I would warn against an evolution too large, i.e. towards accommodating territory. I don’t think this is appropriate in the current perspective,” she declared a few days ago in an interview with our colleagues at Bloomberg,” noted Alexandre Baradez (IG France).

However, Christine Lagarde did not avoid “the risk of increased frictions in world trade”, which could “weigh on the growth of the euro zone by reducing exports and weakening the world economy”. The ECB has also revised downwards its growth and inflation forecasts from 2024 to 2026.

“As expected, she did not make a commitment on a future direction of monetary policy and did not suggest that a further rate cut was planned for January. Given the high degree of political uncertainty and economic, the ECB maintains its dependence on data and its case-by-case approach for each meeting”, acts Ulrike Kastens, European economist DWS, who [continue] to think that the ECB is on a trajectory of rate cuts.

“Although growth forecasts have been revised downward, risks to the economy are not yet fully reflected in GDP projections. This is expected to be gradually corrected in 2025. We expect another rate cut in January and others will follow. We anticipate that the ECB will reduce the deposit rate to 2% in 2025.

Dovish or not dovish?

“More importantly, in our view, the statement and press conference made it very clear that the monetary stance was still restrictive, with Christine Lagarde (the president of the ECB, editor’s note) stating that there was ‘no question on this subject'”, underlines Frederik Ducrozet director of Macroeconomic Research at Pictet Wealth Management.

“In addition, the wording on inflation and wages was also dovish. High domestic inflation remains a concern, but it was described as the adjustment of ‘certain sectors’ to the inflationary surge passed ‘with substantial delay'”, he continues.

Next major monetary meeting: the outcome on December 18, 2024 of the last FOMC of the year. Thursday marked the traditional publication of weekly registrations for unemployment benefits, up slightly without completely missing the target, close to 240,000 new units. Enough to further confirm the probabilities of around 80%, according to the CME Group’s FedWatch tool, of a drop of 25 basis points in the remuneration of Fed Funds 18/12.

At midday on the foreign exchange market, the Euro was trading against $1.0520 approximately.

KEY GRAPHIC ELEMENTS

The wedge formed since November 22 is coming to an end, and the energy contained is now compressed. An exit from the bottom, consistent with the entry from the top in the second part of November in a volatile environment, is anticipated.

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 1.0661 USD.

The expected profitability of this Forex strategy is 415 pips and the risk of loss is 145 pips.

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