EUR/USD: the euro suffers ahead of tomorrow's big monetary meeting

As tomorrow's ECB Governing Council meeting approaches, the euro continues to suffer from a much stronger "earnings potential" for the coming months than the dollar.

While the Fed is taking an offensive monetary stance, including among its most dovish members, "the ECB's message is a little more blurred," said Thomas Giudici, co-head of bond management at AURIS Gestion. "If the path of tightening is taken for granted, there are still divergences between the members. While some believe that accelerated monetary tightening would have little or no impact on inflation, which is essentially driven by energy prices, the more hawkish members believe that the ECB's inflation forecasts are far too optimistic (back towards 2% as early as 2023) and are therefore less patient in the face of the uncertainty generated by the Ukrainian crisis."

Yet, the latest inflation data, in the sense of the CPI, has allowed 10-year Treasuries to reflate. In detail, the consumer price index, in core data (adjusted for food and energy, highly volatile data), gained 0.25% in March, month over month. So much for core inflation. On the other hand, taking into account the broadest basket of products, the monthly increase is 1.1%, in line with expectations.

In any case, it is this differential in the rate hike trajectory that we will have to continue to monitor closely in order to work the currency pair as effectively as possible.

For tomorrow's meeting, Alexandre Barades (IG France) warns that "Christine Lagarde's speech will be followed closely to determine the timetable for the end of asset buybacks and for a possible rate hike. The pretext of the war in Ukraine and the risks to economic growth could again buy time for a possible monetary tightening in the Eurozone."

In statistics yesterday, the German ZEW index of confidence in the economy, continues to sink, admittedly at a slightly slower pace than anticipated. At -40.9, it is still at a low point since the confines of March 2020.

On the agenda this Wednesday: crude oil inventories in the US at 16:30 (European time).

At midday on the foreign exchange market, the euro was trading at around $1.0815.

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 $1.0850, which we described yesterday as a safety net, would release additional selling energy in a bout of volatility. This breakout is underway, and requires validation. Our view remains bearish, however.

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 $1.0828. The price target of our bearish scenario is $1.0686. In order to preserve the capital invested, we advise you to position a protective stop at $1.0911.

The expected return on this Forex strategy is 142 pips and the risk of loss is 83 pips.