EUR/USD: the FED faces a tough equation

The euro was balancing around $1.05 as traders were extremely cautious ahead of the outcome of another Fed policy meeting on Wednesday. This is a key meeting in the sense that investors want to know to what extent the Federal Reserve is ready to make a move after the particularly disappointing growth figures for the first quarter.

The question that remains, and which will focus investors' attention in the press conference, is that of a possible "easing", with the appropriate inverted commas, of the forecasted rate hike trajectory, following the publication of the first, not very promising, estimates of US growth for the first three months of the year...

"The Federal Reserve chairman could, however, soften his tone on future rate hikes, although new ones are expected in the coming months," says Vince Boy (IG France), who is basing his opinion on the disappointment caused by the US GDP figures for Q1. It's all a matter of judgement in this area.

Especially since, as Manuel Auboyneau (Amplegest) says, "The 2 uncertainties linked to the duration of the Ukraine war and the importance of the China virus wave make the analysis uncertain in the short term."

"In both cases, a rapid improvement would have immediate disinflationary effects (via commodities for Ukraine and supply chain restoration for China). A prolongation of these two risks would only anchor inflation at high levels", he adds.

And on the sole question of US GDP in the first quarter, "if the publication, prima facie, of -0.3% in quarterly variation of US growth (-1.3% on an annualised basis against +1% expected) marks a clear slowdown compared to the last quarter (+7% on an annualised basis), the more detailed reading of the components shows a more resilient picture of the US economy", however, qualifies Thomas Guidi, Co-Head of bond management at AURIS Gestion.

"Indeed, GDP was essentially impacted by a soaring trade deficit (-3.2 pts), aimed at replenishing consumer goods inventories, as well as by lower government spending. At the same time, consumption continues to hold up well, with, for example, a further increase in consumer spending in April (+1.1% against +0.6% expected and +0.6% the previous month), despite high inflation on almost all goods".

Right now, the pair is trading at $1.0525.

KEY CHART ELEMENTS
Since breaking out of a broad consolidation wedge on April 4, the selling camp has been confident, with 19 red bodies in the last 23 candles drawn. A break of a fragile intermediate floor at $1.0850, which we called a guardrail, has released additional selling energy, in a bout of volatility. This break now validated leads to the locking of new bearish targets, towards $1.0250. It will then be time to contrarian anticipate a powerful challenge bounce. We are starting to place our trailing stops deliberately close now as the likelihood of a rebound progresses.

MEDIUM TERM FORECAST
Given the key chart factors we have mentioned, our medium-term view on the Euro Dollar (EURUSD) is negative.

Our entry point is $1.0528. The price target of our bearish scenario is $1.0251. In order to preserve the capital invested, we advise you to place a protective stop at $1.0605.

The expected return on this forex strategy is 277 pips and the risk of loss is 77 pips.