EUR/USD: the dollar, a refuge asset with a better return

The Euro remained stuck on perfect parity against the Dollar, in a precarious equilibrium on the eve of the outcome of a new Fed monetary policy committee. Since the publication of the inflation figures for August (in particular the "core" CPI), the scenario of a 100 basis point hike is no longer excluded, even if 75 bps remains the option most commonly cited by economists and analysts interviewed.

For Vince Manuel, Chief Investment Officer, Indosuez Wealth Management, the USD, with the confirmation of the maintenance of an "ultra-aggressive" monetary policy, retains a decisive advantage. "Propelled by rising interest rates, the USD has also been supported by the risk-averse environment accompanying the rate hike, as investors seek the safety of the world's reserve currency - which happens to be the highest-yielding developed market currency."

As for the euro, it's suffering from being a barometer of risk appetite. In this respect, the publication of PMI indicators on Friday will be decisive (preliminary data for the current month). The German industrial component will be particularly scrutinised. As a reminder, the PMI (Purchasing Managers' Index) is a health barometer, calculated after a survey of purchasing managers. It is a valuable leading indicator for traders.

The gloomy geopolitical framework does not favour the Euro, especially for its repercussions on gas prices, whose decline since the beginning of the month must be confirmed. "Faced with a European winter consumption of about 250 billion cubic meters, current reserves do not allow to be protected from the risk of shortage. In the event of a total halt to Russian gas deliveries, restrictions will be imposed in certain countries, notably Germany," warns Regis Begue of Lazard Freres Gestion.

"President Xi has said that China is "ready to work with Russia to defend the fundamental interests of both countries", notes César Perez Ruiz, Head of Investments and CIO at Pictet Wealth Management. The decoupling between the US and China seems to be increasing, while the polarisation of the world is becoming increasingly clear. A source of volatility in risk assets...

At 14:30 today (central European time), the US housing starts and building permits will be released.

At midday on the foreign exchange market, the Euro was trading at $1.0006.

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. The return to high volatility is near.

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 $1.0009. The price target of our bearish scenario is $0.9701. In order to preserve the capital invested, we advise you to position a protective stop at $1.0101.

The expected return on this strategy is 308 pips and the risk of loss is 92 pips.