EUR/USD: very poor ZEW figures, and how they affect the EUR

The euro continued to suffer against the dollar, now in close proximity to a technical safety net at $1.0848/$1.0850, ahead of an ECB Governing Council meeting that is expected to highlight, once again, a different approach on this side of the Atlantic.

While the Fed is taking an offensive monetary stance, even among its most dovish members, "the ECB's message is a little more blurred," says Tom Giudici, co-head of bond management at AURIS Gestion. "Although the path of tightening is established, divergences remain between members. While some believe that accelerated monetary tightening would have little impact on inflation, which is essentially driven by energy prices, the more hawkish members believe that the ECB's inflation forecasts are too optimistic (a return to 2% as early as 2023) and are therefore less patient in the face of the uncertainty generated by the Ukraine crisis".

In any case, and even if it doesn't help, of course, the uncertain outcome of the presidential election in France, between two fundamentally opposed visions of Europe, is not causing additional pressure at this stage. "It's the macro, not the Macron, that is driving the view," in this case bearish, Nomura quips in a note today.

"The ECB may have more hikes planned, but rates are still expected to rise faster in the US. The risk is that the ECB is unlikely to validate the July pricing of a potential rate hike just yet due to uncertainty over the impact on growth of the conflict in Ukraine."

It is therefore this differential rate hike path that we will need to continue to monitor closely to work the currency pair as effectively as possible.

If we take a step back and leave the two sides of the Atlantic for a moment, "China is also increasingly worried about the rise in the number of Covid cases and the increase in restrictions and confinements in the country, which could accentuate the economic slowdown of the world's second largest economy", according to Alexandre BARADEZ (IG France). "This could also increase supply risks and inflation around the world." Yet the Euro is a proven benchmark barometer of risk appetite in financial markets.

In the immediate future, the German ZEW economic confidence index continues to fall, albeit at a slightly slower pace than expected. At -40.9, it is still at its lowest point since the March 2020 confines. Professor Achim Wambach, President of the Zentrum fur Europaische Wirtschaftsforschung, said: "The ZEW economic sentiment indicator remains at a low level. Experts are pessimistic about the current economic situation and assume that it will deteriorate further. The decline in inflation expectations, which roughly halves the considerable rise of the previous month, gives reason for hope. However, the prospect of stagflation over the next six months remains".

To be followed this afternoon are the various consumer price indices in the US, one of the key measures of inflation and an essential working basis for the Fed in the construction of its monetary policy.

Right now, the pair is trading at $1.0870.

KEY CHART ELEMENTS
Since breaking out of a broad consolidation wedge on 4 April, the selling camp is confident, with 7 red bodies in the last 8 candles drawn. A break of a fragile intermediate floor at $1.0888, which we called a higher low.

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 $1.0870. 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 $1.0935.

The expected return on this strategy is 184 pips and the risk of loss is 65 pips.