EUR/USD: caught between diplomatic fears and macroeconomic relief

The USD continues to fall against the EUR after Thursday's publication of the first signs of a flattening of the price increase curve, suggesting that the end of the tunnel is not in sight, but that there is hope of a softening of the Fed's tone at the next monetary meetings. It should be pointed out that this "decline in inflation is mainly linked to the health sector", says Vincent Bay (IG France) in particular, who means that the change in the methodology for calculating health costs has a significant impact on CPIs. Furthermore, as Jeanne Bitton, Head of Research and Strategy at BFT Investment Managers, points out, "prices of services excluding energy remain firm due to the "housing" component which is still accelerating. As a reminder, in October, on an annualised and seasonally adjusted basis, prices excluding food and energy rose by 6.2%".

The EUR, as a barometer of risk appetite, remains supported in the immediate term by hopes of a gradual easing of the drastic anti-covid measures in China, and by the publication of a jump in the ZEW confidence index for the German economy, from -59.1 to -36.8. "The ZEW indicator of economic sentiment in the Eurozone's largest economy rose again this month. This is probably linked above all to the expectation that inflation rates will fall. In that case, policymakers would not have to rein in monetary policy as hard. However, the economic outlook for the German economy is still negative," says ZEW President Achim Wambach.

The producer price index rose by "only" 0.1% in monthly terms (stable excluding food and energy) in October, whereas the consensus was for a more pronounced rise in prices.

In addition, the New York Fed's Empire State manufacturing index moved back into positive territory, at 4.5 points, beating the target by a wide margin. "New orders fell slightly, while shipments rose slightly. [With respect to the labour market, indicators point to a solid increase in employment and an increase in the number of hours worked. Input prices rose at about the same rate as last month, while the increase in selling prices accelerated. On the other hand, companies expect business conditions to worsen over the next 5 months."

The progress of risk assets in general remains conditional, however, on the diplomatic situation between NATO and Moscow since the fall of a Russian-made missile on Polish territory.

At midday on the foreign exchange market, the Euro was trading at around $1.0350.

KEY CHART ELEMENTS
The single currency reached levels not seen since August, and for the first time since 20 September, and managed to amplify its excursion beyond the level of perfect parity. The crossing of two remarkable moving averages (20d on 50d) is validated. The next test is underway, that of a resistance level around $1.0350. Beyond that, a more extensive recovery of the euro could be expected.

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 $1.0432. The price target of our bullish scenario is $1.0745. In order to preserve the capital invested, we advise you to place a protective stop at $1.0269.

The expected return on this forex strategy is 313 pips and the risk of loss is 163 pips.