EUR/USD: uncertaintly regarding July's Fed funds rate hike

The Euro was still in a bearish bias against the dollar, however, as buying and selling forces were momentarily balanced. The single currency, the benchmark barometer of risk appetite on the markets, continued to suffer from the risks of a recession in the main economic centres on both sides of the Atlantic, and the dollar failed to accentuate its gains after the Fed's minutes, published last night, left the door open to a 50 basis point hike in the Fed Funds at the end of the month, an option that is just as likely as the 75 basis points on which the market was basing itself.

As a reminder, at the end of the last MPC meeting, the Fed Funds were raised by 75 basis points, a scenario that had been (very partially) digested by the market. "A new 75bp tightening is even still possible in July given the dynamics of inflation expectations in the medium/long term", for Christophe Morel, Groupama AM, who sees the cost of money at 3.50% at the end of the year.

ECOFI's strategists predict that the Fed will raise rates by 75 basis points (bps) in July, 50 bps in September and 25 bps in November and December. "We expect the Fed funds rate to be 3.25%/3.5%, close to the peak of the tightening cycle." Based on the "three shocks [that] are hitting the world: the war in Ukraine [which] is pushing Europe into recession; the blockades in China [which] are causing a noticeable decline in activity; the monetary and fiscal tightening in the US [which] is starting to weigh on the housing market, even though prices remain high.

The preparation, according to information from Bloomberg, of new fiscal stimulus measures to accelerate infrastructure construction, also explains this pause in the hemorrhaging of the single currency, which earlier in the week had to face the publication of activity indicators (PMI Composite) very unhappy.

At midday on the foreign exchange market, the Euro was trading at around $1.0182.

KEY CHART ELEMENTS

The spot is in the process of breaking a fragile neckline of a chartist pattern, which sends a clear bearish message. For the time being, our objective is to reach, with increasing volatility, the perfect parity of one Euro for one Dollar. If this is the case, a powerful rebound could eventually take shape.

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 $1.0190. Our bearish scenario price target is $1.0001. In order to preserve the capital invested, we advise you to set a protective stop at $1.0278.

The expected return on this forex strategy is 189 pips and the risk of loss is 88 pips.