EUR/USD: the bearish bias resumes

Between two monetary policy meetings, on both sides of the Atlantic, the EUR/USD has experienced intense volatility, without questioning the underlying bearish bias. The USD is holding its ground, in anticipation of a slightly harsher tone from the Fed.

As a reminder, the European Central Bank completed a new meeting of its Board of Governors on Thursday. A transition meeting before the crucial December meeting. As expected, the ECB maintained all its measures to support the economy on Thursday despite the strong rise in inflation in the euro zone, which postpones the decision on a gradual normalization of monetary policy to December. Economic activity in the euro zone continues to recover strongly but "the momentum is slowing," said Lagarde, who also reaffirmed that rates would not be raised until the medium-term inflation target of 2% is in sight.

The Fed will conclude a meeting of its Monetary Policy Committee on Wednesday, 3 November. According to iBanFirst forecasters, "from mid-November or early December at the latest, the volume of asset purchases should decrease by $15 billion each month. Thus, in December, it could be only $105 billion, then drop to $90 billion in January, etc. At this rate, the central bank should no longer carry out asset repurchases as early as June 2022. This will then allow it to raise the policy rate, currently between 0% and 0.25%, if the economic situation requires it, especially if inflationary pressures persist. The foreign exchange market at this stage anticipates a first policy rate hike in September 2022."

Inflation data, slightly exceeding expectations, did not halt the single currency's decline late last week. The consumer price index showed confirmation of the heating up of prices. Adjusted for volatile items (food, energy, alcohol and tobacco), prices rose last month at an annualized rate of 2.0%, now slightly above the ECB's target path.

On the statistical agenda today: the US ISM manufacturing PMI at 15:00.

Right now, the pair is trading at $1.1567.

KEY CHART ELEMENTS

The now confirmed break of the 20-day moving average (in dark blue) in daily data, and in an outburst of volatility, whose bearish direction is becoming more pronounced, is inviting traders to resume their bearish initiatives on the EUR/USD. First target locked at $1.1486, second at $1.1360. In the very short term, the scenario of a short sideways drift defined by the amplitude of Friday's candle body cannot be excluded.

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 $1.1570. The price target of our bearish scenario is $1.1361. In order to preserve the capital invested, we advise you to position a protective stop at $1.1626.

The expected return on this forex strategy is 209 pips and the risk of loss is 56 pips.