EUR/USD: Slight contraction in risk appetite

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The Euro continued its decline against the Dollar two days before the Moody’s agency’s verdict on the French note.

“It is worth remembering that at Moody’s, France benefits from the Aa3 rating with a “stable” outlook. In a gradual rhythm of adjustment, a rating agency first lowers the outlook, moving it from “stable” to “negative”, then secondly, decides to downgrade the rating if no improvement in the outlook is noted”, recalls Alexandre Baradez, head of market analysis at IG France.

Until now, the “sanctions” of the rating agencies have weighed more on the single currency than on stocks, with the CAC even enjoying the luxury of registering new historic highs.

“But on Friday, Moody’s could well decide to skip the outlook lowering step and go straight to downgrading the rating. Indeed, a rating agency can lower a credit rating without first changing the outlook. S&P, Moody’s or Fitch can lower a rating due to sudden events (such as financial difficulties, policy changes or market shocks) without first adjusting the outlook.

Forex traders are also awaiting major monetary meetings from October 28 to 30, with the conclusions of a Council of Governors of the ECB and a FOMC of the Fed. If on the European side, a status quo on rates is widely expected, the “suspense” is complete on the American side, especially since the shutdown deprives currency traders of valuable benchmarks, with federal organizations no longer publishing their studies on employment, or even price dynamics.

For the Fed, IbanFirtst experts expect “two additional rate cuts within 6 months, to 3.75% against 3.50% for the futures markets (futures contracts); due to the persistent risk of inflation. We consider that the inflationary effect of American tariff policy will be less significant than initially anticipated. On the other hand, it will not be painless. Once the impact of shutdown on the publication of statistics will be estimated, we should start to see a rebound in inflation in the fourth quarter which should encourage the institution to be cautious.

The September NFP (Non Farm Payrolls) is particularly eagerly awaited.

“Let us also add that the real estate market is much more resilient than what economists had predicted at the start of the year. This is a factor supporting inflation that cannot be overlooked. The cycle of rate cuts is far from over. A reduction of 25 basis points is certain this month. However, this cycle will not be as linear as the previous ones due to the contrary signals sent by the economy.”

Finally, geopolitics partly explains the loss of appetite for measurable foreign exchange risk. D Trump said Tuesday evening that he did not want a meeting with Russian President Vladimir Putin if this meeting was of “nothing.” “I don’t want to waste time so we’ll see what happens,” he proclaimed to the press, according to comments relayed by Agence France Presse (AFP).

The meeting between the two men in Budapest, initially scheduled for two weeks, therefore seems postponed, in view of this declaration.

At midday on the foreign exchange market, the Euro was trading against $1.1585 approximately.

KEY GRAPHIC ELEMENTS

The bullish oblique that prevailed until now (in black on the chart) is now broken, with pullback confirmation. The negative view is offered under this oblique, while the relative strength index collapses. The 20-day moving average (in dark blue) has just broken the trajectory of its 50-day counterpart (in orange) at a significant angle.

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 1.1584 USD. The price target for our bearish scenario is at 1.1013 USD. To preserve the capital invested, we advise you to position a protective stop at 1.1731 USD.

The expected profitability of this Forex strategy is 571 pips and the risk of loss is 147 pips.

DAILY DATA CHART