EUR/USD: watch out for a false start

While the prospect of further monetary tightening on the ECB's side seems inevitable, especially since Monday's release of record inflation in the Eurozone, the EUR/USD remained below perfect parity, ahead of today's outcome of a new Fed Monetary Policy Committee.

The challenge, beyond a widely anticipated 75 basis point increase in Fed Funds, is to refine the "neutral" rate projections, i.e. the money rate beyond which the Fed acts as a braking force to prevent the economy from overheating. The Federal Reserve will be able to rely on the PCE indexes published Friday. Consumer prices according to this index (Personal Consumption Expenditures Price Index) have indeed increased by 6.3% over one year. In October, prices rose by 0.5%, within the target. The Fed will naturally take into account the tensions on employment, while the monthly figures (NFP) are expected on Friday. Today, the survey by the private HR firm ADP will provide a valuable preview.

"At this point, while the "dovish pivot" seems to be getting closer, it is not yet a given! Indeed, despite the entry into recession, the signals militating for a continuation of the monetary tightening cycle have not yet dissipated and encourage us to remain cautious" warns Roman Balin, (Auris Gestion). Beware, therefore, of "a false start, in terms of "dovish pivot", and this, on both sides of the Atlantic.

As a reminder, inflation figures (consumer price indices in first estimate for the current month) showed a runaway in the Eurozone, at +10.8% annualized, and +4.9% excluding food, energy, alcohol and tobacco, the most volatile items. "Regarding the main components of Eurozone inflation, energy is expected to have the highest annual rate in October (42%, compared to 40.8% in September), followed by food, alcohol & tobacco (13%, compared to 11.9% in September), industrial goods excluding energy (5.9%, compared to 5.6% in September) and services (4.5%, compared to 4.2% in September)," says EuroStat.

Right now, the pair is trading at $0.9876.

KEY CHART ELEMENTS

In a volatile environment, the currency pair has successively traced two marubozus in daily data, of equal magnitude, and comparable level, around the perfect parity, which continues to constitute a pivot level in the immediate future.

MEDIUM-TERM FORECAST

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

Our entry point is $0.9927. Our bearish scenario price target is $0.9666. In order to preserve the capital invested, we advise you to position a protective stop at $1.0001.

The expected return on this strategy is 261 pips and the risk of loss is 74 pips.