EUR/USD: 4 Fed Funds hikes this year?

Between two major monetary meetings (ECB Governing Council last week and Fed FOMC this week), the euro continues to suffer from a marked downward bias, while seeing the forces at work rebalance in the very short term around $1.1000.

The European Central Bank (ECB) completed another meeting of its Governing Council on Thursday. In a surprise decision to accelerate its asset purchase programme, Ms Lagarde reopened the door to a possible rate hike by the end of this year, which had previously been out of the realm of possibility.

"Faced with such a powerful external inflationary shock, the monetary response does not seem to be the most appropriate," says Ronan Blanc (Analyst Manager at Financière Arbevel). "After its 180° turn last month, we were expecting a little more clarity in a particularly anxious context. The ECB is no longer in control of time. It considered that the situation on the bond market was not comparable to that of the first days of the pandemic and therefore did not require support from the ECB. Let's hope investors don't take her at her word by testing her willingness to intervene."

"While the eventual exit from negative rates in Europe may seem inevitable, the timing of these announcements raises questions. The road to normalisation is now open, but the institution is not making any statements about the timetable. It is therefore taking the path of the Fed without having the means (or the necessity?) to do so. Let's hope it doesn't regret it."

It is also a difficult equation on the US side, with the Fed completing a new FOMC meeting on Wednesday 16 March, at the end of which the scenario of a 25 basis point increase in Fed Funds is anticipated. "The main issue at stake at the meeting is how many rate hikes there will be this year. This will have an influence on both economic developments (via the credit relay, among others) and on the evolution of dollar pairs, such as the EUR/USD," comments William Gerlach, Director France of iBanFirst.

"Last December, the central scenario was based on three rate hikes in 2022. The cost of money would then rise to 0.9%. Then it would rise to 1.6% in 2023 with two more rate hikes. In the longer term, it would rise to 2.5%. If the central bank believes that the priority is to fight inflation, which is certainly the case following the surge seen in the first two months of this year, it is not impossible that we could end up with a central scenario with four rate hikes this year."

There are no statistical indicators that could significantly move the currency pair today. However, it will become very dense today with, in particular, the German ZEW, the producer price index and the Empire State index in the United States.

Right now, the pair is trading at $1.0966.

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 (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 $1.0968. Our bearish scenario price target is $1.0455. In order to preserve the capital invested, we advise you to place a protective stop at $1.1081.

The expected return on this Forex strategy is 513 pips and the risk of loss is 113 pips.