EUR/USD: the risk appetite barometer seems to be working

The EUR/USD continued to reflect the combination of a loss of short-term risk appetite in the financial markets and expectations of a further tightening of the Fed's tone.

Unfriendly signals from China were particularly vexing at the very end of the summer. "China will be watched with fears that the party will continue its regulation of large companies and the real estate sector could be its new main target, as China's second largest real estate developer Evergrande, faces more and more difficulties with its debt," notes Vincent Bay (IG France).

The Fed is finishing (today to be exact) this week with just a new meeting of its Monetary Policy Committee (FOMC). For Thomas Costerg, senior US economist at Pictet Wealth Management, "the main message at the end of the Federal Reserve's monetary policy meeting on 22 September will be that it is "urgent to wait" before reducing monthly asset purchases (currently $119 billion per month). The Fed is expected to guide more or less explicitly towards a 'tapering' for the next meeting in November. We expect a first cut of $14 billion effective from early December; tapering should end next summer."

However, the internal debates could well be tumultuous, according to the economist, "since the regional members of the Federal Reserve seem to want a firmer 'turn of the screw' on both QE and rates afterwards, being more hesitant about inflationary risk, for the moment still brushed aside by Powell. There is also a growing fear about the financial stability risks of leaving such monetary accommodation in the system."

"The latest statements from FOMC members as well as the correction seen in the markets recently suggest that investors are expecting a less accommodative speech from the Fed chairman this Wednesday night," says Vincent Bay.

Right now, the pair is trading at $1.1730.

KEY CHART ELEMENTS
The short term downtrend, as well as the medium term downtrend on the spot market, is aligning. The general idea remains bearish, especially since the formation of "three black crows" on 6, 7 and 8 September and traders can initiate "short" positions on the EUR/USD by aiming at a first target at $1.1674. The second target is locked at $1.1486.

Only a clear breach of the 100-day moving average (in orange) would validate a behavioral reversal. However, this underlying trend line is taking on an accentuated bearish bias. In addition, chart resistance is taking shape below $1.1880.

MEDIUM-TERM FORECAST
Given the key chart factors we have mentioned, our medium-term view on the pair is negative.

Our entry point is $1.1701. The price target of our bearish scenario is $1.1487. In order to preserve the capital invested, we advise you to position a protective stop at $1.1771.

The expected return on this Forex strategy is 214 pips and the risk of loss is 70 pips.