EUR/USD: a new acceleration of EU prices, greater than expected

Weakened by the inflation figures in the Eurozone (first estimates for August), in the midst of the gas crisis, the EURUSD spot fell back below parity, in a perilous position. The consumer price index in the Monetary Union accelerated beyond expectations, at +9% annualised. Excluding food, energy, alcohol and tobacco (volatile items), prices rose by 4.2%, compared to 4% expected, putting pressure on all risk asset classes, of which the Euro is a prominent representative...

Unsurprisingly, it is energy that is directly and indirectly driving prices up. "In terms of the main components of eurozone inflation, energy is expected to have the highest annual rate in August (38.2%, compared to 39.7% in July), followed by food, alcohol & tobacco (10.6%, compared to 9.8% in July), industrial goods excluding energy (4.9%, compared to 4.4% in July) and services (3.8%, compared to 3.8% in July)," EuroStat said in its release.

The likelihood of an ECB rate hike of 75 bps at the next Governing Council meeting next month is mechanically increasing.

"The ECB has no choice but to engage in faster monetary tightening as long as inflation continues to rise," says Frederik Ducrozet (Pictet Wealth Management) in a note. "However, policy normalisation will be difficult and a stop-and-go approach seems increasingly possible. This means that the ECB could pause when the recession hits in early 2023, but resume raising rates when the economy recovers later in 2023."

This inflation comes against the backdrop of the gas crisis in Europe, which is of growing concern to investors, who fear that the world's major economic hubs will enter recession. Geopolitical "hot spots" (between Russia and Ukraine, between China and Taiwan) complete a bleak picture.

Inflation, on the other side of the Atlantic, is also nervously crystallising the attention of currency traders, after a Jackson Hole conference in the second half of last week, which ended with a tone that was, to say the least, firm from the world's major money makers.

The fight against inflation in the United States "will hurt American households and businesses", but giving up would be even more damaging for the economy, warned Jerome Powell, head of the US central bank (Fed), on Friday. The Fed chairman said from the idyllic Wyoming valley that returning to price stability "will take time" and will lead to "a long period of weaker growth" and "a slowdown in the labour market". The central banker also warned that fighting inflation would "hurt American households and businesses". The Fed wants to bring price inflation down to around 2%, and this policy will have "a series of 'unfortunate costs'", he also said.

In terms of macroeconomic statistics on Tuesday, while the Conference Board's consumer confidence index rose to 103.19, significantly more than the financial community expected, the new job openings (JOLTS), the statistic that quantifies job vacancies, weighed negatively in the debates as it highlighted new persistent signs of tension in the US job market. Signs that are leading indicators of inflation...

Right now the pair is trading at $1.0052.

KEY CHART ELEMENTS
The underlying bias remains strongly bearish, below a 50-day moving average (in orange) that carries significant chart weight. In the immediate future, nervous oscillations around the parity are envisaged. Note the bearish acceleration of the above-mentioned underlying trend line.

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 $0.9980. Our bearish scenario price target is $0.9701. In order to preserve the capital invested, we advise you to set a protective stop at $1.0101.

The expected return on this Forex strategy is 279 pips and the risk of loss is 121 pips.