EUR/USD: a technical rebound appears likely

The euro, which has been suffering against the dollar for more than a year, fell sharply below parity last week, in high volatility, under the combined effects of a very bellicose tone from the Fed, a burning geopolitical context and activity indicators leaving little doubt that the Eurozone will go into recession in the coming months. The euro attempted a (very timid) technical rebound at the beginning of the week, even as major US indicators (Conference Board consumer confidence, PCE prices, Q2 GDP) were coming in.

In the immediate term, traders are still struggling to digest the IFO business climate index in Germany. The barometer of the Eurozone's largest economy missed expectations and fell to 84.2 points, the lowest since March 2020 and the start of the health crisis. The comments accompanying the raw data of the survey 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."

The USD is benefiting from a double effect: that of a safe haven, which it enjoys fully, and that of the prospect of a still strong yield spread for several years against the EUR. "The weakening of market expectations regarding US inflation (the two-year break-even inflation rate in the US has fallen to 2.2%) does not mean that the Fed considers its work to be done, on the contrary, it wants to see proof that realised inflation is decreasing before relaxing its tightening cycle," says Vince Manuel, CIO at Indosuez Wealth Management.

Today at 16:00 (central European time): the consumer confidence index in the US. An indicator with a strong potential impact, in the event of a deviation from the target (the consensus is 104 points).

At midday on the foreign exchange market, the euro was trading at $0.9611.

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 $0.9615. Our bullish scenario price target is $0.9889. In order to preserve the capital invested, we advise you to place a protective stop at $0.9549.

The expected return on this forex strategy is 274 pips and the risk of loss is 66 pips.