EUR/USD: central banks are scrambling to overcome a tricky situation

As the fighting intensifies in Ukraine, the market psychology remains unchanged in the foreign exchange market, with the dollar strengthened by its safe-haven attributes, which are fully expressed in this geopolitical context, and the euro compressed by the global drying up of risk appetite in the financial markets. Against the backdrop of the Russian regime's determination to continue its offensive in Ukraine, regardless of the sanctions imposed by the international community, traders are naturally wondering about the impact on the respective monetary tightening schedules of the Fed and the ECB.

John MERCADAL, Director of Investment Strategies and Eric BERTRAND, Deputy Director and Head of Asset Management at OFI AM, however, point out that "the path towards the exit from the current accommodative monetary policies has already been mapped out and this will be the year when normalisation begins. The main central banks have announced their intention to reduce their balance sheets by reducing the pace of securities purchases until they stop completely within a few months. The US FED has already started to reduce its purchases, the Bank of England is about to do so and the ECB will stop its purchases in March."

But it is the high-stakes question of the pace of this monetary tightening (the angle of the curve, to use a telling image) that is at stake, and which will be a headache for the world's leading moneymen.

The strongest divergences appear on the question of the level of key rates. Central banks should be more cautious in their monetary tightening than the market expected, as the economic impacts of the war and associated sanctions are difficult to measure at present, particularly in Europe.

The inflation-growth equation has been turned upside down with the addition of new unknowns.

"This geopolitical crisis is taking place against a backdrop of rising prices and central banks that are just beginning their monetary normalisation cycle," summarises Raphaël Thuin, Head of Capital Markets Strategies at Tikehau Capital. "This new uncertainty has added complexity to the question of the return of inflation, in a context where Russia remains a key supplier of natural gas to Europe".

For Germany alone, the Eurozone's leading economic power, as it approaches the scheduled end of operation of its last nuclear power plants, dependence is very strong: between 50% and 60% of its consumption comes from Russia.

On Monday, the macroeconomic statistical indicators were relegated to the background. However, we should mention the industrial PMI in the Eurozone, which was in line with expectations (at 58.3 for the IHS Markit final data for January) and above expectations for the US manufacturing ISM for January at 58.5.

In the meantime, EuroStat recently published the latest inflation figures for the Eurozone, which are above expectations at +2.8% annualised, excluding the basket of volatile items (food, energy, alcohol and tobacco).

Right now, the EUR/USD is trading at $1.1110.

KEY CHART ELEMENTS
The transition phase between 4 and 23 February, in the form of a non-federating slide below the 100-day moving average (orange), is over. The bearish bias is aligned with the short term, and the red body of a remarkable candle on Thursday illustrates the firm grip of the selling camp. We are revising our bearish targets to $1.10, and then if necessary to $1.0856.

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

Our entry point is $1.1096. Our bearish scenario price target is $1.0857. In order to preserve the capital invested, we advise you to place a protective stop at $1.1216.

The expected return on this forex strategy is 239 pips and the risk of loss is 120 pips.