EUR/USD: the groggy euro is flirting with parity

The Euro continued its bearish bias towards perfect parity with the dollar on Friday, in a very poor soil for risk appetite. "The Euro-dollar could fall below parity in the next few weeks if (1) energy prices, and especially gas prices, continue to rise, weighing even more on the zone's growth and external accounts, or (2) if the ECB disappoints on its anti-fragmentation tool (the Transmission Protection Mechanism) and tensions on sovereign debt worsen again," according to LBPAM strategists.

In the immediate future, traders have taken note of the NFP report (Non Farm Payrolls), the federal report for employment in June. The report's content is rather reassuring in the sense that the Fed's fear of a price/wage spiral has been postponed for the time being. The US economy has managed to create 371,000 jobs in the private sector (excluding agriculture), well above expectations, without any excessive spiral in wage dynamics. As for the unemployment rate, it remains stable at 3.5% of the active population, marking almost full employment, on its pre-Covid levels.

The euro, 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 on Wednesday evening, left the door open to a 50 basis point increase in Fed Funds at the end of the month, an option that is 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 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 drop in activity; the monetary and fiscal tightening in the US [which] is starting to weigh on the housing market, even though prices remain high.

Right now, the pair is trading at $1.0163.

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

Our entry point is $1.0152. The price target of our bearish scenario is $1.0001. In order to preserve the capital invested, we advise you to place a protective stop at $1.0251.

The expected return on this forex strategy is 151 pips and the risk of loss is 99 pips.