EUR/USD: a reinforced bearish technical signal

The valuable 50-day moving average (in orange) continued to be a dynamic chart strength of resistance, on the EUR/USD, ahead of today's outcome of a new ECB Governing Council meeting.

"Inflationary pressures remain high and the Governing Council aims to quickly move policy rates back to neutral territory," says Konstantin Veit, portfolio manager at PIMCO, who believes "the ECB will raise policy rates by another 75 basis points at its October meeting. We expect an additional 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 normalization to policy tightening."

On the Fed side, traders remain on the lookout for any signals to negate or confirm a scenario of a slower pace of monetary tap tightening in the months ahead. Investors are clinging to a report in the Wall Street Journal that some members of the Federal Reserve are not averse to slowing the pace of its monetary tightening starting in December before halting key rate hikes early next year. According to the article, the Fed would be moving toward a 0.75 percentage point rate hike at its next meeting in early November.

Tom Giudici, co-head of bond management at Auris Gestion, wonders whether this is a harbinger of the long-awaited "dovish pivot" by the Fed. In any case, FOMC members still seem divided, with the most dovish advocating a pause to observe the consequences of tightening financial conditions. While core inflation should continue to be strong in the coming months due to strong inertia in certain components (notably rents), will the Fed take the gamble of releasing pressure too soon after being wrong in 2021?

With a German IFO very slightly above expectations, the expectation of ECB decisions and relative lull on gas prices allow the risk currency to make some resistance on this first part of the week.

"Clement temperatures, rising imports, a resumption of hydroelectric production, a slowdown in demand and a deterioration in the growth outlook are combining to weaken natural gas prices below €130/MWh," said the strategists at BFT Investment Managers. "Europe's initiatives (grouped purchases by a consortium, new reference price for March 2023 and dynamic price limit on the TTF market in the meantime, solidarity in case of shortage) appear timid," they temper.

In terms of statistics, investors were informed on Monday of valuable activity indicators: the PMI (Purchasing Manager's Index), for services and industry, in first estimate for the current month. Let's note that the disappointment is strong on the German industrial component, at -45.7, the lowest since June 2020... The Flash PMI for manufacturing production in the euro zone fell to 44.3 (46.2 in September). This is a 29-month low.

Right now, the pair is trading at $0.9867.

KEY CHART ELEMENTS

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

MEDIUM TERM FORECAST

In view of the key chart factors we have mentioned, our medium-term view on the EUR/USD is negative.

Our entry point is $0.9864. Our bearish scenario price target is $0.9401. In order to preserve the capital invested, we advise you to position a protective stop at $1.0001.

The expected return on this forex strategy is 463 pips and the risk of loss is 137 pips.