EUR/USD: the FED is haunted by inflation

After the ECB last week, it is now the Fed's turn to attract the attention of traders, who want to know how J Powell intends to get out of a complex equation: that of fighting chronically galloping inflation, without provoking an entry into a recession, even though the scenario of an entry into a wage/price loop is not ruled out.

"The FED Chairman needs to maintain an aggressive stance, especially after last week's inflation figures. He should reaffirm that the FED's number one priority is to slow inflation, and that it will act accordingly, and more vigorously if necessary", say analysts at La Française.

As a reminder, inflation (including food and energy) has reached a monthly rate of 8.7% in the US.

In a preview commentary entitled "Fed is haunted by high inflation", Thomas Costerg, Senior US Economist at Pictet Wealth Management, provides the following insights: "The Fed had previously communicated on two 0.50% hikes at the June and July meetings, but persistent leaks in the press evoking a 0.75% hike put this last possibility squarely on the table. The Fed is panicking after the May inflation report showed an annual price increase of 8.6%. The famous 'peak' in inflation is still to come."

On the statistical front on Tuesday, the even weaker than expected score on the ZEW index of confidence in the German economy weighed on risk appetite. The eponymous index came in at -27.9 this month. "The economy remains exposed to many risks, such as the effects of sanctions against Russia, the unclear pandemic situation in China and the gradual shift in monetary policy. So although expectations have improved, they are still in negative territory," comments ZEW President Professor Achim Wambach. Producer price dynamics are clear and have not moved away from the target.

Right now, the pair is trading at $1.0474.

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 in week 23 reinforced the bearish message.

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 $1.0485. 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 $1.0561.

The expected return on this forex strategy is 234 pips and the risk of loss is 76 pips.