EUR/USD: the wedge broken to the downside

In a context of reduced risk appetite, in the absence of concrete progress in the diplomatic negotiations between Russia and Ukraine, the EUR broke the lower part of a consolidation wedge, sending a bearish signal. Forex traders, in a now chronically inflationary environment, against the backdrop of fears of a slowdown in growth, are trying to gauge the likelihood of the US and the Eurozone entering a sustained period of stagflation. "While inflationary pressures are likely to persist, the ECB will have", according to Tom Giudici, head of bond management at Auris Mgmt, "no choice but to accelerate the normalisation of its monetary policy, probably faster than the market anticipates, with a rate hike as early as September."

As for the Fed, which began its monetary turn earlier, it will be able to rely on good news on the employment front, in the sense that the last NFP report (March federal report) was of good quality, without showing any signs of worsening tensions. This temporarily removes the spectre of a price/wage spiral. Thomas Giudici notes that "job creation has once again remained strong with a sharp revision on the previous month. At the same time, the rapid rise in wages continues with a further increase of 0.3% over the month, bringing the rise to 5.7% over the year. While the strengthening of the price-wage loop is still the main focus, the further increase in the labour force participation rate is good news as it is likely to dampen this runaway growth."

Yesterday, the Sentix index plunged to -17.9 this month, the lowest since July 2020, even as investors tried to regain their composure out of the first lockdown. As a reminder, the Sentix index of investor confidence in the European Monetary Union is calculated after a survey of 2,750 representative investors and analysts on their expectations for the next six months. Sentix is an expert in behavioural finance. However, the monthly US industrial orders figures were right on target.

Yesterday morning, the final services PMI data (IHS Markit) for March in the Eurozone came out at 55.7 points, above the target. Chris Williams, chief economist at S&P Global comments on the latest PMI figures: "With the impact of the latest variant easing and the Eurozone economy opening up more, activity in the region rose again at a solid pace in March, extending the rebound in growth that occurred after the Jan. slowdown."

Right now, the pair is trading at $1.0911.

KEY CHART ELEMENTS
As long as the spot rate is above $1.10, the oxygen supply is assured. Below that, there are plenty of technical arguments to justify taking short positions. For the time being and in the absence of an interesting entry point, traders will avoid exposure. As for the background matrix, it remains unchanged. The transition phase between 4 and 23 February, in the form of a non-federating slide below the 100-day moving average (in orange), is over. The bearish background bias is aligned with the short term, and a remarkable red body candle pattern on Thursday 24/02 illustrates the firm grip of the selling camp. With 5 red-bodied candles from 1 to 7 March, and a continuous selling mobilization in week 9, the picture remains bleak. Confirmation of a wedge formation is underway. A navigation within it is still to be expected. We will therefore keep an eye on its two bounds, represented in black on our chart. A break of the lower boundary would accelerate the breakout. This has begun, and may continue, with or without a pullback.

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 $1.0970. The price target of our bearish scenario is $1.0686. In order to preserve the capital invested, we advise you to place a protective stop at $1.1056.

The expected return on this forex strategy is 284 pips and the risk of loss is 86 pips.