EUR/USD: perfect parity hit ahead of major monetary events

Between the outcome of the ECB Governing Council and a new Fed policy committee next week, there will be a good opportunity for traders to fine-tune the respective monetary paths, and to deduce the potential for a "pay" spread between the two currencies.

On the Fed side, traders remain on the lookout for any signal that would confirm or deny a scenario of a slowdown in the pace of monetary tightening in the months ahead. Investors are clinging to a report in the Wall Street Journal that some members of the FED 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.

Thomas Giudici, co-head of bond management at Auris Gestion, says: "Is this 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 [excluding food and energy] 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 the pressure too soon after being wrong in 2021?"

On the ECB side, the scenario of a 75 basis point increase is almost unanimous. "Beyond the probable and consensual decision to raise rates by 75 basis points, it is more the speech of Mrs. Lagarde that will be scrutinized," says Emmanuel Auboyneau, Managing Partner of Amplegest. The European economy is slowing down significantly and will probably enter a recession soon.

"Should the ECB continue to act strongly on inflation, even if it means worsening an already worrying economic situation, or should it, like the Federal Reserve in the United States, start to adopt a less offensive tone? Ms. Lagarde is walking on eggshells and must keep a difficult balance between growth and inflation. That's what's at stake at this meeting, which will set the tone for the next few weeks."

In terms of statistics, the IFO business climate index took a break from its downward trend. A sideways step, according to Nomura strategists "after significant declines during 2022." For them, "as the German recession takes hold, [...] the current situation component will continue to decline, while the expectations component is expected to bottom out."

Across the Atlantic, the Conference Board's consumer confidence index came in this month at 102.4, sharply below expectations.

Right now, the pair is trading at $1.0013.

KEY CHART ELEMENTS

The forces at work were momentarily rebalancing in the immediate vicinity of perfect parity, with traders making a "rendezvous" on this threshold before two crucial monetary meetings that could tip the balance of power. Neutral opinion issued for the time being.

MEDIUM-TERM FORECAST

Based on the key chart factors we have mentioned, our medium-term view on the EUR/USD is neutral.

We will maintain this neutral view as long as the pair is positioned between support at $0.9500 and resistance at $1.0000.