EUR/USD: the dollar preserves its edge

Since the break of the 20-day moving average (in dark blue) on the spot, a bearish bias is gradually taking hold of the currency pair. And this while traders had ECB benchmarks last week and are waiting for Fed benchmarks this week. Will the dollar's "profitability" expectation for the coming months be higher than the euro's? In other words, will the Fed take a firmer tone than its European counterpart as signs of economic heat (on prices, employment, supply chains) appear?

The Fed will meet its monetary policy committee (FOMC) today and tomorrow (Wednesday). And at this stage does not seem to be shaken by the inflationary signals. Excluding items considered volatile (energy, food, alcohol and tobacco), prices rose last month at a monthly rate of 0.6%, above a consensus of +0.4% and a month of April at +0.89%. That is 5% annualized. The 10-year Treasuries remain calm, however. One of the leads put forward is that "this surge in inflation could have a negative impact on growth by weighing on household purchasing power." This would lend credence to the preferred theory of the transitory nature of inflation, and thus "the absence of a threat at this stage of a heating up of the economy detrimental to growth values... " according to Aurel BCG's strategists

Last week, the ECB confirmed its ultra-accommodative attitude. Unsurprisingly, the European Central Bank's "doves" won out once again, with the institution announcing that the rapid pace of asset purchases under the Emergency Pandemic Purchase Program (EPPP) would be maintained in the third quarter. The central bank, however, was considerably more confident about the economic outlook, significantly raising its GDP growth projections for 2021 and 2022 and indicating that the risks to the economy were now "balanced" (rather than more to the downside as had been the case previously). This analysis of the situation is consistent with the assumption of a gradual exit from the ultra-accommodating policy phase starting in the fall.

Vince Manuel, Chief Investment Officer at Indosuez Wealth Management, supports this idea: "Now comes the difficult part of the equation: the future of the asset purchase programs. The decision to launch the Emergency Pandemic Purchasing Program (EPPP) was made against the backdrop of a massive virus and a historic recession. Now that the vaccines are underway and the return to work is intensifying, with GDP growth revised to 4.5% this year, it may be difficult for the ECB to justify extending the EPPP beyond spring 2022. Behind closed doors, we can expect lengthy discussions among ECB Council members on this topic in the coming months, and we shouldn't expect the QEPP to become a quantitative easing measure for all time."

The single currency was stabilizing its losses at the start of the week thanks in particular to the good surprise of industrial production in the monetary union, up 0.8% on a monthly basis for April, exceeding the consensus by two times, according to the latest figures from EuroStat. The pan-European statistical institute said that compared to April 2020, industrial production increased in all member states with the largest increases in Italy (+80%), Slovakia (+70%).

Right now, the pair is trading at $1.2128.

KEY CHART ELEMENTS

The 20-day moving average (in dark blue), a valuable benchmark and decision-making tool for many months on the spot market, is in the process of confirming a downward trend. The high shadow of the 9 June candle, combined with a red candle without a low shadow this Friday, would support a bearish scenario that could be materialised by taking short positions as long as the Euro/Dollar is sailing below the aforementioned trend line.

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 $1.2120. The price target of our bearish scenario is $1.1965. In order to preserve the capital invested, we advise you to position a protective stop at $1.2160.

The expected return on this Forex strategy is 155 pips and the risk of loss is 40 pips.