EUR/USD: The Governing Council meeting is the highlight of the week

Today, the Euro/Dollar currency pair further validated the breakdown of a major technical level, as risk appetite in the financial markets is being redefined, with a remarkable divergence of the main assets traditionally representative of this appetite: the Euro, down, equities, in nervous sideways movement, and oil, up.

Forex traders believe that the last two are still major drivers of the bond market.

Last week's statements by Fed boss Powell were seen as overly cautious, downplaying concerns of a resurgence in inflation. "Jerome Powell's speech didn't succeed in reassuring investors" and it will take more from the US central bank in the coming days to calm the market, said J. Plassard, investment director at Mirabaud. Inflationary sentiment was reinforced on Friday by the content of the US federal employment report.

The report is on the whole very (too?) convincing. If the dynamics of wages are in line with expectations - and it is rather likely to reassure the market moreover - the number of job creations in the private sector excluding agriculture (+380,000) has exploded expectations (+200,000), during last month. Data for January was revised upward to +165,000. As for the unemployment rate, it decreased to 6.0% of the labour force, according to the latest data from the Bureau of Labor Statistics.

Tom Coster, economist at Pictet Health Management, sheds light on the situation: "It is quite clear that the FED will not respond to a surge in inflation, which will be driven mainly by commodities, in the spring. It should not change its position on a rate hike - the message will not stay for at least "2 years", a signal sent by J. Powell during his congressional hearing last month. On the other hand, it is possible that the bond market will continue to test the limits of the FED, but we don't think these limits are very far away (i.e. there is little tolerance for a rise in long rates from now on in our opinion) in a context of high indebtedness making the US economy very sensitive to rate movements - not forgetting the engine of economic recovery: real estate".

This week, traders will be paying close attention to the language provided by the ECB, which is completing a new Governing Council this Thursday.

The Frankfurt institution "will likely not take any concrete measures at this meeting", says Franck Dixmier (Allianz GI). On the other hand, its communication should be firm on a few points:

1) The maintenance of favourable financial conditions: in a context of still fragile recovery of the economies in the euro zone, Christine Lagarde will likely point out the danger of too pronounced a tightening of financial conditions that could result from a rise in rates, especially if it were too rapid. The ECB should therefore reaffirm its vigilance to ensure that financing conditions remain extremely accommodating for governments, but also for companies.

2) The transmission of monetary policy: even if spreads remain tight, they will remain a point of vigilance, and the central bank should reaffirm the importance of maintaining a perfect transmission of monetary policy".

On the statistical side this morning, the Euro also suffered from disappointing industrial production figures in Germany (-2.5% in January), significantly off target.

Right now, the pair is trading at $1.1879.

KEY CHART ELEMENTS
The 100-day moving average test (in orange) on the EUR/USD ended with a break and the euro is now at levels against the dollar that had not been seen since 2020. A continuation of the clearings is envisaged. The formation of a large consolidation triangle between the quoted underlying trend line and the black dotted line is resulting in a bottom exit.

MEDIUM-TERM FORECAST
In view of the key chart factors we have mentioned, our opinion is negative over the medium term on the EUR/USD exchange rate.

Our entry point is $1.1877. Our target price for our bearish scenario is $1.1621. In order to preserve the capital employed, we advise you to position a protective stop at $1.1934.

The expected return on this forex strategy is 256 pips and the risk of loss is 57 pips.