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#1 16-06-2022 11:34:48

johnedward
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From: Paris - France
Registered: 21-12-2009
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EUR/USD: the central banks are having a hard time convincing markets

EUR/USD: the central banks are having a hard time convincing the markets


If one were to sum up the situation this week, with the influx of news from the major central banks on both sides of the Atlantic, each of them is obliged to take very firm measures, even if it means jeopardising the fragile return to post-Covid growth. Each of them is obliged to take very firm measures, even if it means jeopardising the fragile return to post-Covid growth. While they had momentarily reassured, the soufflet quickly fell back.

- First of all, for the Fed, which concluded a meeting of its Monetary Policy Committee (FOMC), which resulted in an additional 75 basis points of tightening on the Fed Funds, at a time when inflation is reaching 8.6% (annualised data, including food and energy). "There is significant disagreement among FOMC members about the pace of rate hikes," warns Will Gerlach, France Director at iBanFirst. "The lowest dot plot for 2024 is at 2% while the highest dot plot is at 4%. This is unprecedented in the history of the FOMC. This means that there is a clear lack of visibility regarding the direction of the economy (both inflation and growth) in the coming years."

- Then there is the ECB, which held an extraordinary, emergency Governing Council meeting (even if this term is not part of its title) to try to contain the fire. Ulrike Kastens, Economist Europe, DWS, notes that "the growing tension due to the widening of spreads on the eurozone bond markets is having an impact: the European Central Bank is responding with a more flexible reinvestment policy under the PEPP. More importantly, it is announcing a new "anti-fragmentation" tool to combat a permanent and unjustified widening of yields. Although the design of this tool is still unclear, the announcement of its implementation should provide some relief to markets."

"Overall, this should also give the ECB the opportunity to raise policy rates more quickly and aggressively, with spread widening limited to some extent. The ECB is likely to announce this new tool as early as July, when it could raise policy rates for the first time since 2011."

Franck Dixmier, head of bond management at Allianz Insurance Group, points out that "this statement does not actually bring anything new compared to what was communicated at last week's meeting. The ECB seems to be losing its bearings," he said, "handicapped in its ability to raise rates without being hindered by the negative impact of a tightening of monetary conditions on the countries with the most fragile public finances (first and foremost Italy)." A lot of noise for nothing, and a credibility that is not enhanced.

To make matters worse, everything was off target on Wednesday on the macro statistics front, whether for the dynamics of industrial production in the Eurozone, or for the United States: retail sales (-0.3% in monthly data), the Empire State manufacturing index, which fell into negative territory, or import prices.

Right now, the pair is trading at $1.0408.

KEY CHART ELEMENTS
The failure to touch the 50-day moving average (in orange) is now in place, and bearish targets towards $1.0350 and $1.0250 are locked in. A close on the weekly lows in week 23 reinforced the bearish message.

MEDIUM TERM FORECAST
Based on the key chart factors we have mentioned, our medium-term view on the EUR/USD is negative.

Our entry point is $1.0411. The price target of our bearish scenario is $1.0251. In order to preserve the capital invested, we advise you to place a protective stop at $1.0509.

The expected return on this forex strategy is 160 pips and the risk of loss is 98 pips.

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