EUR/USD: all eyes are on IMF manager

The balance of power in the euro/dollar pair was tending to balance out as traders' calendars were set to be red-flagged with new US inflation data on Friday and the outcome of a new European Central Bank (ECB) Governing Council meeting tomorrow. If a status quo on rates themselves is achieved, traders will inevitably want to know more about the intentions and degree of aggressiveness for the July deadline.

For Frederik Ducrozet, Head of Macroeconomic Research, and Nadia Gharbi, Senior Economist, at Pictet Wealth Management, "The 50bp option will remain on the table. While we expect the ECB to opt for the safer option of a 25bp hike in July, recent inflation data has increased the probability of a 50bp move. Lagarde has not explicitly ruled out the option, nor has Philip Lane, although the chief economist has supported a "gradual" normalisation process in the form of a "benchmark pace" of quarterly 25bp hikes."

The question of this estimated rate of hike is of course an essential key to gauging the future "pay" differential between the two spot currencies.

On Tuesday the bad macroeconomic surprise of the day was definitely the dynamics of German industrial orders, which contracted by 2.6% in April on a monthly basis, completely missing expectations. As a reminder, in March the contraction was -4.1% (updated figures). The strength is counteracted on Wednesday with an upward revision of the Eurozone growth momentum in Q1 to +0.5 quarterly.

Right now the pair is trading at $1.0710.

KEY CHART ELEMENTS
The spot has just fallen back below its 50-day moving average (in orange), a trend line with a persistent downward bias. A daily candle closing well below the lower shadow of the Tuesday 31/05 candle would give more substance to the bearish scenario. The view remains bearish but with no clear sign at this stage of a potential increase in volatility. The stop is clearly identified, just above the weekly highs (week 22) reached on Monday 30/05.

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 $1.0706. Our bearish scenario price target is $1.0455. In order to preserve the capital invested, we advise you to place a protective stop at $1.0788.

The expected return on this Forex strategy is 251 pips and the risk of loss is 82 pips.