EUR/USD: a perilous tightrope walk on the edge of parity

The Euro made a perilous pullback on the perfect parity against the USD, in a context of sharp contraction of appetite for risk since the publication of the American inflation in August, inflation which largely missed the expectations, by sweeping away the hope of a slowing down of the dynamics of prices on the other side of the Atlantic. This even makes the scenario - not widely shared but far from far-fetched - of a 100 basis point rate hike next week at the end of the FOMC (Fed's monetary policy council) credible.

Excluding volatile items (food and energy), prices rose in August by 0.55%, or 6.4% in annual terms.

"The gradual normalisation of supply chains should allow [goods inflation] to continue to fall", according to strategists at Lazard Freres Gestion. "However, this will not solve the overall inflation problem in the US, which is now coming more from services."

The EUR/USD spot has 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 USD linked to the mechanical expectation of a higher "remuneration" trajectory for the dollar.

Yesterday, the US producer price index came out in line with expectations, contracting by 0.1% month-on-month in August. Excluding food and energy (+0.3%), it even slightly exceeded expectations. Forex traders also took note of a particularly disappointing industrial production, in sharp contraction of 2.2% in monthly rhythm in July, completely missing the pessimistic expectations.

This afternoon, the US will be watching retail sales, the Philly Fed, the Empire State index and new jobless claims at 14.30 (central European time).

In the meantime, traders have taken note of the trade balance in the Eurozone, with a deficit of more than 39 billion euros, far from the consensus, the target being missed by more than 30%.

Right now, the pair is trading at $0.9980.

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. For the time being, we are witnessing a short pullback on the pair.

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 $0.9989. 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 288 pips and the risk of loss is 112 pips.