EUR/USD: a quality bearish entry point

The Euro was back in contact with its 50-day moving average (in orange), a decisive test of a resistance level that has made sense since late February. This comes ahead of the outcome of a new European Central Bank (ECB) Governing Council meeting.

"Inflationary pressures remain high and the Governing Council is aiming to quickly return its key rates to neutral territory," summarises Konstantin VEIT, portfolio manager at PIMCO, who believes that "the European Central Bank (ECB) will raise its key rates by another 75 basis points at its October meeting. We expect a further 50 basis point hike in December, which would bring the policy rate back to 2% and towards the upper end of most estimates of a neutral policy rate setting for the eurozone. We expect the Governing Council to make clear that a neutral policy framework may not be appropriate under all conditions, and we expect a transition to 25 basis point increases next year as the hike cycle pivots from policy normalisation to policy tightening."

On the Fed side, traders are clinging to a report in the Wall Street Journal that some Fed members are not averse to slowing the pace of its monetary tightening from December before halting key rate hikes early next year. According to this article, the institution would be heading for a 0.75 percentage point (75 bp) rate hike at its next meeting in early November.

In the meantime, operators have just taken note of precious activity indicators: the PMI (Purchasing Manager's Index), for services and industry, in first estimate for the current month. Let us note that the disappointment is strong on the German industrial component, at -45.6, the lowest since June 2020... The Flash PMI for manufacturing production in the euro zone fell to 44.2 (46.3 in September). This is a 29 month low.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, comments on the latest PMI Flash survey figures: "Although the current economic slowdown is primarily the result of the rising cost of living, concerns are focused primarily on the energy crisis and are causing activity levels to fall, particularly in energy intensive sectors. At the same time, inflationary pressures remain very high, as declines in commodity prices induced by improved supply chains have been offset by rising energy and labour costs and the depreciation of the euro."

On Friday the Eurostat Eurozone Consumer Confidence Index rose only marginally to -28 points, still very much in negative territory.

At midday on the foreign exchange market, the euro was trading at around $0.9840.

KEY CHART ELEMENTS
We are resuming our bearish work on the Euro/Dollar currency pair, with a suitable entry point, following a pullback on the parity and 50-day moving average. With the advantage of having a clearly defined stop loss level, which mechanically increases the quality of the money management associated with the operation. "Trend is your friend", as the precious stock market adage teaches us. This contact gives the proposed operation a major statistical interest.

MEDIUM-TERM FORECAST
Given the key chart factors we have mentioned, our medium-term view on the Euro Dollar (EURUSD) is negative.

Our entry point is 0.9837 USD. Our bearish scenario price target is 0.9401 USD. In order to preserve the capital invested, we advise you to set a protective stop at 1.0001 USD.

The expected return on this Forex strategy is 436 pips and the risk of loss is 164 pips.