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#1 20-06-2022 09:15:56

johnedward
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From: Paris - France
Registered: 21-12-2009
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EUR/USD: markets are nervous, persistent downtrend remains in place

EUR/USD: markets are nervous, persistent downtrend remains in place


Volatility remains intense in the EUR/USD currency pair, which is still in a bearish bias, amidst an extremely busy week of monetary policy decisions by the world's major Central Banks.

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

More surprisingly, the ECB last week held an extraordinary, emergency Governing Council meeting - even though that 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 widening spreads in 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, however, 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 says, "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.

In terms of statistics, the week was decidedly complicated, to say the least. All the important indicators came out below their respective targets once again on Thursday, whether it was for the Philly Fed manufacturing index (-3.3), new weekly jobless claims (+229K) or home sales and building permits. The only relative advantage that investors can see in this week's poor statistical series is the hope of a lighter hand from the Fed at the next FOMC. Let's get the date of July 28 right now.

Right now, the EUR/USD is trading at $1.0518.

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

Our entry point is $1.0520. The price target of our bearish scenario is $1.0251. In order to preserve the capital invested, we advise you to set a protective stop at $1.0641.

The expected return on this forex strategy is 269 pips and the risk of loss is 121 pips.

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