EUR/USD: the central banks are in a tricky situation

The pair continued to reflect the sudden drying up of risk appetite in the financial markets since the start of the Russian invasion of Ukraine, with investors shifting their focus from the single currency to the safe haven USD. Traders are now focused on the big money makers on both sides of the Atlantic, whose monetary trajectories are inevitably impacted by "an inflationary shock that will make the situation particularly harsh for the central banks", according to T. Prébay, Deputy Director at Financière Arbevel. The central banks are "between a rock and a hard place", says T. Giduci, co-head of bond management at Auris Gestion.

"The risk is to raise interest rates and thus restrict financing conditions while the risks to growth increase," continues Giduci.

While the Fed's equation is probably less complex, the question of the angle of the upcoming monetary turn is the one that arises. While a 50 bp increase in Fed Funds was almost a consensus not long ago, a 25 bp increase is now the scenario clearly envisaged by J. Powell himself in his semi-annual hearing before the Parliament. The first elements of a response will be given on 16 March at the end of the FOMC (Monetary Policy Committee).

For the ECB, which is holding its monetary policy meeting this week, "the situation is more complex", according to Giduci, "because the area of the ECB is not yet fully covered, the zone is more directly impacted by the Russian-Ukrainian situation. If Christine Lagarde's insinuations (and unspoken words) in February argued for a more hawkish ECB, it could finally catch up with the branches of the December decisions which foresaw an increase in the APP (to compensate for the PEPP) until the end of the year before a possible first rate hike in 2023." First elements of answer this Thursday at the end of the Governing Council.

In terms of Monday's stats, the Eurozone investor confidence index (Sentix) fell to -6.9, the lowest since November 2020. Sentix is an analysis firm specialising in behavioural finance. The indicator produced is calculated after analysing a questionnaire sent to 2,800 investors and analysts on their economic forecasts for the Eurozone in the next six months.

For the record, on Friday, the NFP (Non Farm Payrolls) report, a monthly federal report on employment, highlighted much better than expected job creation (+679,000 in the private non-farm sector) as well as an even stronger than expected contraction of the unemployment rate, to 3.9% of the active population. Tensions in the US labour market are still high, and this is one of the sources of future inflation.

Right now, the EUR/USD is trading at $1.0941.

KEY CHART ELEMENTS
The transition phase between 4 and 23 February, in the form of a non-federation slide below the 100-day moving average (in orange), is over. The bearish bias is aligned with the short term, and the red body of a remarkable candle on Thursday 24/02, illustrates the firm grip of the selling camp. With 6 red-bodied candles in the last 6 candles, the last one still being traced, and a continuous selling mobilization last week, the picture remains bleak. We are revising our bearish targets to $1.0685 and then if necessary to $1.0454.

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 $1.0894. The price target of our bearish scenario is $1.0455. In order to preserve the capital invested, we advise you to place a protective stop at $1.1001.

The expected return on this forex strategy is 439 pips and the risk of loss is 107 pips.