EUR/USD: a tense geopolitical and monetary atmosphere

The EUR/USD pair melted away from perfect parity on Wednesday following the Federal Open Market Committee (FOMC) meeting. The Fed did not shock the market with a 100bp hike in Fed Funds, and opted for the most widely anticipated scenario of a 75bp hike to bring the dollar rate to 3.25%. Two more hikes are expected before the end of the year. What has significantly penalised the market, however, is the pessimistic nature of the Fed's economic forecast revisions, on unemployment, at 4.3% in 2023, on inflation (2025 only for a return to 2%), and on growth (almost zero this year, and 1.1% in 2023).

This will put more pressure on the "risky" asset that is the single currency, while ensuring a very favourable yield differential for the greenback.

"The update of central banks' views on future economic developments now shows a willingness to raise interest rates to 4.3% for the rest of the year and to keep them slightly above that level (at 4.5%) until 2023," notes Christian Scherrmann, U.S. economist at DWS. "The jump from the Fed's June projection is considerable: 100 basis points higher than in June. So future policy looks more hawkish than before."

"This meeting demonstrates once again that the Fed is willing to do what is necessary to keep inflation in check. It will slow demand by keeping rates higher for longer - even if that means growth and jobs will be lost," the economist adds.

The safe-haven nature of the dollar is thus fully expressed, in the current ultra tense geopolitical context. The "Master" of the Kremlin announced, yesterday morning during a televised address, a partial mobilisation of 250,000 men, and brandished again the threat of the use of nuclear weapons. "The statements of Putin are also a reflection of his weakness," says Frédéric Rollin, investment strategy advisor at Pictet AM. "Moreover, mobilising and arming so many soldiers is probably beyond his means".

Right now, the pair is trading at $0.9846.

KEY CHART ELEMENTS
The move back below parity with the dollar is symbolic. It reinforces the bearish nature of the underlying bias. The confirmation by the volatility is important, with about 200 pips of sharp decline. We tip the perfect parity (one-to-one) into a major resistance level, and keep in mind that the 50-day moving average (in orange), is an important trend following benchmark.

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 $0.9868. Our bearish scenario price target is $0.9501. In order to preserve the capital invested, we advise you to set a protective stop at $0.9961.

The expected return on this forex strategy is 367 pips and the risk of loss is 93 pips.