EUR/USD: ECB meeting, towards a more aggressive or lenient tone?

The mood in the foreign exchange market remained nervous as the ECB's Governing Council approached a major meeting. Not that the market is expecting a rate hike, but the opportunity is clear to learn more about the size of the July hike (25 or 50 basis points), and the pace of subsequent hikes. It is therefore the tone that the institution will adopt that will be gauged (voluntary, firm or aggressive). In addition, the powerful monetary institution in Frankfurt will communicate its inflation forecasts for 2023. The entry into a high altitude plateau for prices, will it be confirmed by the ECB.

For Frederik Ducrozet, Head of Macroeconomic Research, and Nadia Gharbi, Senior Economist, at Pictet Wealth Management, "the scenario of a 50bp hike 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 this 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."

For César Perez Ruiz, Head of Investments and CIO at Pictet Wealth Management, however, it is difficult to decide: "We expect a 25bp hike in July, while a 50bp hike in September seems more likely. In order to counter a major risk related to its monetary normalisation cycle, the ECB could introduce a mechanism to limit the widening of peripheral bond spreads."

This rise in inflation should be seen against a less optimistic outlook for global growth. The OECD has sharply revised its growth forecasts downwards. "Growth is expected to be significantly weaker than expected in most economies. Many of the hardest-hit countries are in Europe, which is highly exposed to war because of its energy imports and the influx of refugees. As a result, the OECD now expects global growth to slow to around 3% in 2022 and to remain at that pace in 2023."

The pressure is naturally strong on the financial assets known as at risk, of which live securities and the single currency are part, the exception remaining at this stage crude oil.

Right now, the pair is trading at $1.0738.

KEY CHART ELEMENTS
The spot has just broken 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 Euro Dollar (EURUSD) is negative.

Our entry point is $1.0716. 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 $1.0788.

The expected return on this forex strategy is 261 pips and the risk of loss is 72 pips.