EUR/USD: Intensification of the gas crisis ahead of the Governors' meeting

On Saturday, even though the gas tap was supposed to be reopened after three days of "maintenance operations", the Kremlin did not keep its commitment. At least things are clear: the use of gas as a political weapon is acknowledged by Russian diplomacy.

Of course, some Russian gas continues to arrive in Europe by other routes, and the Europeans did not wait for this situation to arise before signing new contracts with other suppliers, but it is clear that additional pressure is being exerted, raising the energy crisis on the Old Continent a notch. This pressure is likely to further fuel fears of a long-term inflationary framework, without a "peak", but with a plateau in altitude... And this before a key European Central Bank Governing Council meeting, which ends on Thursday.

"Several ECB members are now openly talking about the idea of a 75bp hike at the September 8 meeting, probably followed by a 50bp hike," says Raphaël THUIN, Head of Capital Markets Strategies at Tikehau Capital. Market expectations for ECB deposit rates in the summer of 2023 now stand at 2-2.25% (as of September 2, 2022) Fighting inflation at the cost of growth seems to be the new norm for central banks.

Yesterday traders dealt with two notable disappointments: the Eurozone services PMI which symbolically dipped back below 50 points in final data for August, and the Sentix investment confidence index, which at -31.9, sank further by completely missing the target. For the PMI, the composite (including industry) final reading was 49.0.

"The second consecutive monthly decline in eurozone private sector activity in August increases the likelihood of a decline in the region's GDP in the third quarter of 2022," comments Chris Williams, Chief Business Economist at S&P Global Market Intelligence.

"The deterioration in economic conditions has also become more widespread, with the services sector now joining manufacturing in the contraction zone. After carrying the growth rebound seen earlier in the year, direct-to-consumer sectors such as travel, tourism and leisure are now reporting a decline in activity as the rising cost of living has caused households to cut back on nonessential spending."

On the statistical agenda this Tuesday, the US services PMI (ISM) at 16:00 (EU time).

Right now, the pair is trading at $0.9924.

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 aforementioned underlying trend line. The closer the 20-day moving average is to the 50-day moving average (in orange), the more interesting the bearish entry point seems to us. This is why money management invites us to move the protective stop closer.

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 $0.9947. Our bearish scenario price target is $0.9701. In order to preserve the capital invested, we advise you to set a protective stop at $1.0001.

The expected return on this forex strategy is 246 pips and the risk of loss is 54 pips.