EUR/USD: the time for a rebound is here

Between the Fed's resolutely bellicose tone last week, and activity indicators bringing the prospect of a contraction in the Eurozone economy closer, the single currency had a difficult week, as did all risk assets, losing nearly 330 pips against the dollar, a currency whose safe haven status suits it more than ever.

As for the PMI's published on Friday (activity indicators calculated from past surveys of purchasing managers), the "scores" remain significantly below the 50 point mark which separates, by construction, a contraction from an expansion in the sector under consideration. The disappointment is particularly strong for the services component alone in Germany, at 45.5 in preliminary data for September, missing the target completely. For the Eurozone-wide composite data, at 48.6 for industry and 48.9 for services, the leading indicator sends a pessimistic message.

Chris Williams, Chief Business Economist at S&P Global Market Intelligence, provided the following additional insights: "An economic recession is emerging in the Eurozone, as companies in the region have reported a deterioration in business conditions as well as increased inflationary pressures, linked to a surge in energy costs. [...] Germany's economic situation deteriorated the most, with the rate of contraction (excluding periods of confinement) reaching its highest level since the global financial crisis".

And this Monday, the IFo business climate index in Germany corroborated this sentiment. The barometer indicator for the Eurozone's largest economy missed expectations and fell to 84.4 points, the lowest since... April 2020 and the start of the health crisis. The comments accompanying the raw survey data are uncompromising and unambiguous: "Pessimism about the months ahead has definitely increased; in retail trade, expectations have fallen to a record low. The German economy is sliding into recession".

A recession that "will lead to an easing of the pressure on commodity prices as well as on the last remaining bottlenecks. While waiting for core inflation to ease, the Fed remains resolute in its stance to curb an overheating economy. For its part, the ECB, which has adopted a similar stance, is not in a position to counter the current energy shock alone, but it can nevertheless avoid the spread of second-round effects in the European economy," says Romain Aumond (BFT IM).

At midday on the foreign exchange market, the Euro was trading at around $0.9666.

KEY CHART ELEMENTS
While volatility has exploded since the last move below parity, this is precisely the time to be wary and avoid getting caught up in the temptation to strengthen bearish positions on the currency pair, which can trigger a counter-intuitive move towards its remarkable 20-day moving averages (in dark blue) at any time.

MEDIUM-TERM FORECAST
Given the key chart factors we have mentioned, our medium-term view is positive on the EUR/USD.

Our entry point is $0.9642. Our bullish scenario price target is $0.9889. In order to preserve the capital invested, we advise you to place a protective stop at $0.9551.

The expected return on this Forex strategy is 247 pips and the risk of loss is 91 pips.