EUR/USD: volatility calms down ahead of FED meeting, USD retains its advantage

Volatility in the EUR/USD is gradually subsiding as the Fed meeting approaches in the middle of the week. The underlying bias remained unchanged, unfavorable to the euro.

The Fed will complete a meeting of its Monetary Policy Committee tomorrow. According to iBanFirst forecasters, "from mid-November or early December at the latest, the volume of asset purchases should decrease by $14 billion each month. Thus, in December, it could be only $105 billion, then drop to $89 billion in January, etc. At this rate, the central bank should no longer carry out asset repurchases as early as next June. 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. At this point, the foreign exchange market anticipates a first policy rate hike in September 2022."

"The Fed Chairman is expected to announce the start of the gradual reduction in asset purchases before the end of the year for 6-8 months. As this announcement is well anticipated by investors, they will be more attentive to the timing of the cuts, but especially to the expectations of FOMC members on a first rate hike," adds Vincent Bay (IG France).

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

On Tuesday, the final PMI manufacturing data (IHS Markit) came out with no significant deviation from consensus, at 58.4 for the Eurozone as a whole.

IHS Markit's chief economist comments, "Eurozone manufacturers reported increased supply chain disruptions last month, which in turn caused a sharp slowdown in production growth. Input delivery times rose at a near-record pace, surpassed only twice in nearly 25 years of surveying, as supply was insufficient to meet demand for raw materials and other components. This trend has resulted, according to the companies surveyed, from capacity constraints at suppliers and growing logistical problems, primarily related to the virus situation, and consisting of shortages of sea containers, sufficient brake capacity, port congestion, lack of drivers and widespread transportation delays."

At midday on the foreign exchange market, the Euro was trading at around $1.1578.

KEY CHART ELEMENTS

The now confirmed daily break of the 20-day moving average (in dark blue), which has been trending lower, is inviting traders to resume their bearish initiatives on the Euro/Dollar currency pair. 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 $1.1596. 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 $1.1675.

The expected return on this forex strategy is 235 pips and the risk of loss is 79 pips.