EUR/USD: parity hit once again

The EUR/USD underwent a sharp downward movement yesterday, reigniting the downward movement in the wake of the release of US inflation figures for last month. The figures fully countered the idea of a slowdown in the rise of prices. The EURUSD spot therefore suffered a "scissor effect", consisting of two forces:
- a fall in the Euro linked to the need to get rid of risky assets in favour of safe havens
- a rise in the dollar linked to the mechanical expectation of a higher "return" trajectory for the greenback.

If we summarise the situation chronologically: decelerating inflation had allowed the Fed to soften its tone - albeit relatively -; then Jackson Hole set the record straight before August inflation, published yesterday, sounded the final bell for the short recess. And it did so brutally. Just look at the 10-year Treasuries, which have soared to 3.50%. The Nasdaq Composite, which is highly sensitive to currency issues, fell by 5.15% on Tuesday.

The consumer price indexes have in fact cruelly dampened the mood, invalidating the idea of a brake on price increases. In particular, excluding volatile items (food and energy), prices rose in August by 0.6%, or 6.3% on an annual basis.

This is enough to "leave the Federal Reserve (Fed) on alert for the time being", according to the strategists at Pictet WM. "A third 75bp hike in the policy rate is likely on 21 September, followed by 50bp in November and 25bp in December, which would bring the Fed's final rate to 4% (versus our previous forecast of 3.25%)."

Looking at the backdrop of the picture, still dominated by geopolitical risks (Russia-Ukraine, China-Taiwan), the context is not favourable for risk appetite in financial markets.

"We therefore remain in a complex macroeconomic environment, combining geopolitical tensions, high inflation, risk of recession and restrictive monetary policy, while the mid-term elections are looming in the United States," says Vincent Manuel, Investment Director at Indosuez Wealth Management.

Yesterday traders saw the ZEW index continue to fall, more deeply than economists and analysts expected. The confidence index in the Eurozone's largest economy is at its lowest level since October 2008. To be followed today in a few minutes at 14:30.

This morning, another disappointment in the Eurozone with a particularly disappointing industrial production, in sharp contraction of 2.2% in monthly rate in July, completely missing the expectations which are pessimistic.

Right now, the pair is trading at $0.9992.

KEY CHART ELEMENTS
The move back below parity with the dollar is symbolic. It reinforces the bearish nature of the underlying bias. Especially since it is following the formation of two consecutive high shadows above the 50-day moving average (in orange), that volatility has increased. This underlying trend line is definitely a reliable and valuable dynamic resistance level.

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 $0.9997. 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 strategy is 296 pips and the risk of loss is 104 pips.