EUR/USD: the market's psychology remains unchanged following the FOMC meeting

The markets accepted with disconcerting ease the outcome of the FOMC (last night): the Fed, it is true, in an ultra-cautious attitude even in its carefully chosen language. The exercise was without much surprise a gradual preparation of the ground for a forthcoming process of "taper" (reduction of its debt purchases).

"However, there are a few touches that are a bit harsher than expected," notes Fred Rollin (investment strategy advisor at Pictet AM). "There are more FOMC members anticipating a rate hike next year and expectations for 2023 and 2024 have climbed significantly [...] The governors voting this year are overwhelmingly doves. Next year will see several hawks on the committee. Doves will still have the majority, but it will be tighter."

Translating to the foreign exchange market, the Dollar paused against the Euro while maintaining a background bullish bias, in anticipation of a widening "pay" gap between the two currencies.

On the statistical front yesterday, traders are dealing with a battery of barometer indicators (PMI) in Europe this morning. Synthetic data for the entire Eurozone came out at disappointing levels (in the sense of their deviation from consensus), while remaining cheerfully above the 50 points that separate by construction, an expansion from a contraction of the sector considered.

"The Flash PMI data for September highlights a sharp slowdown in economic growth, coupled with strong inflationary pressures in the single currency area," notes Chris Williams, Chief Business Economist at IHS Markit.

"Concerns about rising prices, disruptions to supply chains and the risk of an imminent deterioration in demand due to the current pandemic environment have consequently eroded business confidence, as evidenced by a decline in the 12-month business outlook to its lowest level this year. For now, the pace of growth remains solid despite the slowdown seen over the month, but it is at significant risk of stalling if price and supply headwinds show no signs of abating, particularly if they are accompanied by a rise in virus cases as we head into the fall."

KEY CHART ELEMENTS

The short-term downtrend, as well as the medium-term trend on the spot, 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 of $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 $1.1715. 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 $1.1776.

The expected return on this strategy is 228 pips and the risk of loss is 61 pips.