EUR/USD: Powell kills all suspense

Although the satisfactory start of the quarterly ball of the large European groups catalysed a technical rebound of the EUR/USD in the first part of the week, the reference polarity (negative), finds its rights under the influence still prevailing of the difference of tone, attitude and monetary strategy of the large central banks on both sides of the Atlantic. During a debate yesterday at the IMF/World Bank Spring Meetings, Fed Chairman Powell definitively killed the suspense surrounding the outcome of the next FOMC meeting. The powerful financial institution, barring any extraordinary surprises, will raise its Fed Funds rate by 50 basis points at once, to mark the occasion.

"Let's remember that any increase of 10 dollars in the price of a barrel generates a negative impact of around 0.2% of growth according to the main models", notes Jean-Marie MERCADAL, Director of investment strategies at OFI Holding. "From this point of view, it is the Euro zone that seems the most vulnerable, especially in the current environment because of its greater dependence on Russia. Growth in 2022 is now expected to be 3% compared to 4.1% at the beginning of the year. The US seems more resilient with 3.3% expected compared to 4% initially. It seems that these revision movements are just beginning."

In this context, Mrs Lagarde is faced with an increasingly complex equation, and has to "contain" the more hawkish voices within her own institution.

On the statistics side, yesterday was the return (finally!) of important statistics on the agenda today, with in particular the Philly Fed manufacturing index, which fell significantly to 17.6 this month, missing expectations. "Businesses continued to report overall hiring gains and broad-based price increases. Indicators of future general activity and new orders fell considerably, but respondents continue to expect overall growth over the next six months," read the accompanying commentary. In addition, weekly jobless claims for week 15 came in at 184,000 new units, with little change from week 14 (186,000), according to the latest figures from the US Department of Labour.

This morning, the publication of better than expected activity indicators in the Euro zone is not enough to stop the Euro's decline against the Dollar. In the first estimates for the month, the Services PMI came in at 57.7 and the Manufacturing PMI at 55.3. Commenting on the flash PMI data, Chris Williamson, Chief Business Economist at S&P Global said: "April saw a two-speed Eurozone economy. The manufacturing sector came close to stagnating due to supply constraints, rising prices and signs that consumption was affected by war-related risk aversion. However, April also saw manufacturers suffer as demand shifted from goods to services amid looser pandemic restrictions, including a record rise in spending on leisure activities, such as travel.

Right now, the pair is trading at $1.0820.

KEY CHART ELEMENTS
Since breaking out of a broad consolidation wedge on April 4, 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. Negative opinion proposed.

MEDIUM-TERM FORECAST
Given the key chart factors we have mentioned, our medium-term view is negative on the EUR/USD.

Our entry point is $1.0803. Our bearish scenario price target is $1.0455. In order to preserve the capital invested, we advise you to place a protective stop at $1.0905.

The expected return on this forex strategy is 348 pips and the risk of loss is 102 pips.