EUR/USD: the scissor effect is in place on the pair

The prospect of an even faster than expected rise in Fed Funds is weighing on the single currency, as is the fear of an impact of the confinements in China on global growth. The euro is trapped by a "scissor" effect: the combination of a loss of risk appetite, which it is paying for as a barometer, and the prospect of a lower "return" in the coming years against the dollar.

"The most important theme in the financial markets is the impending tightening cycle of global central banks (with the Bank of Japan's yield curve control being the final step)," says Charlotte de Montpellier, Economist at ING. "We do not expect risk appetite to do well in this environment and this should be reflected in the widening of French spreads relative to Germany."

For the ECB, it is squaring the circle, and this is particularly so because of the greater energy dependence, especially for the Eurozone's leading power, on Russia. "The ECB's problem is what we could call a quadrilemma between inflation, budget deficits, massive debt and national dichotomies: some are pushing for a restrictive policy, others for an accommodating policy and certain combinations seem insoluble... given the current state of the Eurozone's functioning and institutions," says Matthieu Bailly, Deputy Managing Director and bond manager at OCTO AM.

The Euro cannot even find a solid support with the final results of the French presidential elections, nor in the publication, however good, of the IFO business climate index in Germany. The indicator published by Information and Forschung rose to 91.9 points, beating expectations. "This is mainly due to less pessimism in the expectations of companies. Their assessments of the current situation are only slightly better. After the initial shock of the Russian attack, the German economy has shown its resilience," comments Clemens Fuest, President of the Institute.

In Friday's Eurozone statistics, the services PMI came in at 57.7 and its industrial equivalent at 55.3 in the first estimates for the month. 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 $1.0692.

KEY CHART ELEMENTS
Since breaking out of a broad consolidation wedge on 4 April, the selling camp has been confident, with 15 red bodies in the last 18 candles drawn. A break of a fragile intermediate floor at $1.0850, which we described as a guardrail, has released additional selling energy in a bout of volatility. This now validated breakout is locking in new bearish targets.

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 $1.0726. The price target of our bearish scenario is $1.0455. In order to preserve the capital invested, we advise you to place a protective stop at $1.0836.

The expected return on this forex strategy is 271 pips and the risk of loss is 110 pips.