EUR/USD: the balance of power is shifting

The now-confirmed heat on 10-year Treasuries continued to play into the hands of the dollar, while at the same time, concerns from China, notably on the energy front, affected risk appetite on the markets, and thus the euro mechanically. As a result, the currency pair is in the process of breaking an important technical barrier at $1.1675. The bearish target remains at $1.1487.

After rising above 1.5 in the first part of the week (a first since June), the US 10-year government bond yield fell slightly on Wednesday to 1.1497.

New fears from China, this time related to energy, are adding to the Evergrande real estate issue. With coal becoming scarcer and more expensive, environmental restrictions on CO2 emissions, soaring gas prices and factories running at full capacity, China is currently facing power cuts that could slow economic growth. With the cold season approaching, the shortage is worrying the authorities, with Beijing calling last week for "stabilising commodity prices to ensure electricity and natural gas supplies during the winter". According to Bloomberg data, at least 16 Chinese regions have imposed power cuts in recent months.

On the macroeconomic front, yesterday's US data releases included missed targets for the S&P Case Schiller home price index, the Conference Board consumer confidence index and the Richmond Fed's manufacturing index.

Right now, the pair is trading at $1.1605.

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 pair by aiming at a target of $1.1486.

Only a clear breach of the 100-day moving average (in orange) would validate a behavioural reversal. However, the underlying trend line is taking on an accentuated bearish bias. Moreover, a graphic resistance is taking shape under $1.1880.

As we mentioned in the preamble, a fragile safety zone around $1.1675 will now prove decisive. Its break, subject to volatility if necessary, would validate a figure comparable to a chartist pattern, even if it is not a textbook case. Its psychological implication remains of the same nature. This breakout is in progress and requires confirmation in daily closing data.

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

Our entry point is $1.1657. Our bearish scenario price target is $1.1487. In order to preserve the capital invested, we advise you to place a protective stop at $1.1737.

The expected return on this Forex strategy is 170 pips and the risk of loss is 80 pips.