EUR/USD: monetary anguish manifests itself In the forex

The sharp decline in the Euro/Dollar since the second half of last week illustrates both the loss of risk appetite in a market that is finally taking on board the magnitude of the major central banks' fight against inflation, and the Dollar's potential to "pay off", as the US is not immune to entering a wage/price loop.

On Friday, it was the turn of US inflation to focus traders' attention, as an essential basis for the Fed to build and manage its monetary path. On the broadest product base (including food and energy), prices rose at a monthly rate of 1%, against 0.7% expected, and 0.3% in April. This further reinforces the idea of a very firm monetary tightening, weighing on risk assets. At the end of May, annualised inflation (including food and energy) reached 8.6%. Excluding these volatile items from the base, price inflation reached 6%. The "one-peak-inflation-already-behind-us" scenario is clearly losing credibility. And the Fed's and investors' fear of a price-wage spiral is not a definitive option. The main equity indices in the US fell, ending on weekly lows.

As a reminder, on Thursday the European Central Bank concluded a key meeting of its Governing Council. While the powerful monetary institution in Frankfurt did not touch the cost of money itself, it did endorse the end of its asset purchase programme. The President of the institution explicitly announced a 25 basis point (0.25 percentage point) increase in interest rates in July, which will mark the first rate hike since May 2011, but also indicated that it could give a new turn of screw in September and if necessary even more strongly, a priori by 0.5 point (50 bps).

For Alexandre Bardez (IG France), the prices reflect "fears for the global economy but as these fears stem from inflation, which is itself fuelled by the surge in commodities, any more substantial fall in commodities would have a downward effect on inflation expectations, rates...and would therefore take the aggressive rhetoric of central banks down a notch. WTI was only symbolically down to $117 a barrel on Monday.

Risk appetite also remained squeezed by very disappointing US consumer sentiment figures. Released on Friday, it fell to 50.1 (U-Mich, preliminary data) this month, a historic low, comparable to the recessionary period of the mid-1980s.

To make matters worse, China, where vaccination rates remain low, is still struggling with the Covid epidemic, with the threat of a new outbreak in Beijing just days after a cautious reopening of public places.

Right now, the pair is trading at $1.0445.

KEY CHART ELEMENTS

The failure to touch the 50-day moving average (in orange) is now in place, and bearish targets towards $1.0350 and $1.0250 are locked in. A close on the weekly lows has reinforced the bearish message.

MEDIUM TERM FORECAST

Based on the key chart factors we have mentioned, our medium-term view is negative on the EUR/USD.

Our entry point is $1.0471. Our bearish scenario price target is $1.0251. In order to preserve the capital invested, we advise you to place a protective stop at $1.0571.

The expected return on this forex strategy is 220 pips and the risk of loss is 100 pips.