EUR/USD: the bearish message has been delivered

A shrinking risk appetite is a bad thing for the euro; the prospect of tighter US monetary policy is a good thing for the dollar. This is a rough summary of the forces at play, which are putting pressure on the EUR/USD spot, which is currently breaking a small head and shoulder pattern.

As the Fed's Monetary Policy Committee (FOMC) began a new two-day meeting on Tuesday, the last few days' tensions on sovereign yields suggest that traders are banking on a sharper tightening than initially expected, with a possible first rate hike as early as March. The verdict will come at the end of a two-day meeting today. The press conference will be scrutinized in its slightest inflections of language. The 10-year Treasuries were firming up, around 1.75.

"After having been behind the curve for a long time, the Fed is now trying to catch up in an attempt to curb inflation with a hawkish turn that is much more important than initially anticipated by the markets and which is crystallizing some of the tensions at the beginning of the year. This week's FOMC meeting, although the first of the year and therefore traditionally without major announcements, is proving to be a high-risk meeting", explains Thomas Giudic, head of bond management at Auris Mgmt.

In terms of statistics on Monday, traders took note of the flash manufacturing PMI for January in the Eurozone, which was well above expectations, at 58.9, thanks to the support of the German component (60.4). For services, the score misses the target, but only by a small margin.

In the immediate future, traders have just taken note of the IFO business climate index in Germany, which rose slightly to 95.6, slightly above expectations. On the industrial component of the score, "the index jumped significantly," commented Dr. Klaus Wohlrab, director of surveys at the IFO. "Companies were more satisfied with their business. They were also more optimistic about the months ahead. The situation regarding supply bottlenecks for intermediate products and raw materials has eased somewhat. Finally, capacity utilization increased from 85 percent to 85.7 percent."

Right now, the EUR/USD pair is trading at $1.1293.

KEY CHART ELEMENTS
In our previous analysis of the leading currency pair, we warned of the "risk" of a false exit from the top, an extended wedge pattern. Here we are, and the expression of this false breakout has abruptly brought the spot against a 100-day moving average (in orange) with a sharp bearish bias. Traders will be able to gradually resume short positions in the EUR/USD spot by taking advantage of a much better entry point.

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 $1.1280. The price target of our bearish scenario is $1.1001. In order to preserve the capital invested, we advise you to position a protective stop at $1.1371.

The expected return on this strategy is 279 pips and the risk of loss is 91 pips.