EUR/USD: a favourable setting for the dollar's rise

The "scissor effect" that we mentioned in our previous analysis of the EUR/USD is confirmed. The prospect of an even faster than expected Fed Funds hike is weighing on the single currency, as are fears of the impact of the China confinements on global growth and new developments in the Ukraine conflict, as some 40 powers, including the US, met in Germany to agree on additional aid to Kiev. The euro is trapped by this "scissors" 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 years to come against the dollar.

The Fed's rhetoric has become particularly firm since J. Powell clearly put on the table the option of raising Fed Funds by 50 basis points at the next FOMC meeting at the beginning of May, in order to deal with inflation, the "peak" of which no one can see. In addition to price dynamics, it will be particularly interesting to measure the evolution of tensions on the labour market, an essential criterion for predicting wage increases. The verdict will come at the end of next week with the April NFP report.

On the ECB side, "if Christine Lagarde has declared that a rate hike was likely before the end of the year, the path seems less clear (only the end of the asset purchase programme is legible at this stage with discussions on an interest rate hike during the summer) and still too much inscribed in a "dove" approach", analyses Seb Grass, Member of the Executive Board - Director of Asset Management at AURIS Gestion. "Mrs Lagarde must indeed find an appropriate pace of monetary normalisation (a difficult exercise) so as not to weaken the peripheral countries, whose rising government bond yields are already causing market fears."

In an interview with Reuters, Governing Council member Martins Kazaks said that the ECB could reasonably envisage two or three rate hikes this year, given the margin it has.

In recent stats, the IFO business climate indicator for Germany rose to 91.9 points, beating expectations. "This is mainly due to less pessimism in business expectations. 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," says Clemens Fuest, President of the Institute. A figure that gave no support to the euro.

Right now, the pair is trading at $1.0639.

KEY CHART ELEMENTS
Since breaking out of a broad consolidation wedge on April 4, the short side has been confident, with 15 red bodies in the last 18 candlesticks. 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 $1.0685. 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 $1.0801.

The expected return on this forex strategy is 230 pips and the risk of loss is 116 pips.