(News Bulletin 247) – While crude fell very significantly, while remaining firm below $100, the Euro regained some momentum in the short term, by reaching an important technical zone near $1.10. However, the underlying bias remains bearish, in the destabilizing context of the Russian invasion of Ukraine, and its consequences on the markets, particularly in terms of inflation.
The Fed, which wraps up a key meeting of its Monetary Policy Committee (FOMC) tomorrow, is expected to begin a months-long campaign to beat inflation that could see Chairman Jerome Powell act even more aggressively after Russia’s war on Ukraine has pushed prices even higher’, for Eric Lafrenière, US Equities Manager at Richelieu Gestion. “Indeed, consumer price inflation accelerated in February to a new 40-year high on the back of rising gasoline, food and housing prices. even more so after Russia invaded Ukraine. The economic fallout from the war threatens to deliver a double blow: weaker growth and even higher inflation. This will further complicate the Fed’s job.”
Beyond the attempt to solve the complex equation of limiting inflation without breaking growth at the worst time, the pressure is also political in the eyes of Frédéric Rollin, investment strategy advisor at Pictet Asset Management. “Jerome Powell has received the blessing of Chairman Joe Biden, parliamentarians on both sides and many Fed colleagues for a new round of tightening. Households on their side seem increasingly concerned about a price shock in the style of that of 1970. The president of the St. Louis Fed, James Bullard, has also called for a “rapid withdrawal of monetary policy. Governor Christopher Waller has meanwhile declared that he wants a tightening of at least 100 basis points by the middle of the year. And Governor Michelle Bowman says she is ready to take “strong action” to bring inflation back to its target.”
If a 25 basis point hike is almost guaranteed – it is in any case priced in by the market – “The challenge of the meeting is above all to know how many rate hikes there will be this year. This will have an influence on the both on the economic evolution (via the credit relay, among others) and on the evolution of dollar pairs, such as the EUR/USD”, comments William Gerlach, Director France of iBanFirst.
On the statistical side, currency traders will take note at 1:30 p.m. of a leading indicator of inflation, with the various producer price indices across the Atlantic. But in the immediate future, the torment comes from the catastrophic publication, completely missing the already pessimistic expectations, of the ZEW confidence index in the first economic power of the Euro Zone.
The indicator, often called in its contracted form “ZEW”, emerged this month in free fall, at -39.3, the lowest since March 2020, that is to say since the movement of fear caused by the spread of Covid-19. “The war in Ukraine and the sanctions against Russia are significantly clouding Germany’s economic outlook. The collapse of economic expectations is accompanied by an extreme rise in inflation expectations. Experts therefore expect stagflation coming months. The deteriorating outlook affects virtually all sectors of the German economy, but in particular the energy-intensive sectors and the financial sector”, commented the President of the ZEW (Zentrum fur Europaische Wirtschaftsforschung), the Professor Achim Wambach
At midday on the foreign exchange market, the Euro was trading against $1.0995 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 positive in the medium term on the Euro Dollar (EURUSD) parity.
Our entry point is at 1.0988 USD. The price target of our bullish scenario is at 1.0455 USD. To preserve the capital invested, we advise you to position a protective stop at 1.1131 USD.
The expected return of this Forex strategy is 533 pips and the risk of loss is 143 pips.
CHART IN DAILY DATA
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