EUR/USD: new risks are appearing on the scene

The euro, a faithful and reliable barometer of risk appetite on the financial markets, timidly began a bullish reaction against the USD, while maintaining a clear bearish bias, against the backdrop of both micro and macroeconomic fears coming from China, and on the eve of the outcome of a new meeting of the Fed's Monetary Policy Committee, whose tightening of tone would automatically benefit the dollar.

The attitude of the Chinese authorities suggests that Beijing is ready to let Evergrande sink, inflicting its shareholders and especially the holders of its debt (with a nominal equivalent of $300 billion, a world record for a real estate company) with gigantic losses. A fall of Evergrande, present on more than 1300 real estate projects in 280 Chinese cities, would constitute the most difficult test in years for the country's financial system, with repercussions still difficult to envisage beyond that. However, many operators remember a precedent in terms of companies that the authorities let go bankrupt as an example: Lehman Brothers 13 years ago. This does not encourage serenity. Equity markets on both sides of the Atlantic, and all styles of companies, have paid the price.

Other risks, geopolitical and commercial, have added to the tension. "Geopolitical risks should not be underestimated", says Carmine de Franco, Head of Research at OSSIAM: "On the one hand, the legislative elections could see the House of Representatives pass into the hands of the Republicans, which could slow down the reform and investment project that President Biden undertook following the pandemic. On the other hand, we should not underestimate the risks to U.S.-China relations if they were to deteriorate."

Right now, the pair is trading at $1.1726.

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 EUR/USD is negative.

Our entry point is $1.1737. 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 $1.8041.

The expected return on this forex strategy is 250 pips and the risk of loss is 6304 pips.