EUR/USD: negative technical signals at the top of the chart pattern

Consolidation is at work on the EUR/USD, in a foreign exchange market that has to deal with diverging signals, making it difficult to anticipate the Fed's manoeuvres for the coming months. While the option of a 50 basis point increase in Fed Funds for the next term seems to be a foregone conclusion, the question of the "terminal" rate still remains without a precise answer. This is all the more true given that Friday's employment figures and yesterday's ISM services index (56.4) showed signs that the economy is warming up.

The robustness of this part of the US economy has dampened hopes of a more accommodating Fed, following Friday's announcement of job creation that exceeded economists' projections. "The job market is still resilient, however. If tensions are also a little less strong there, the labour market remains surprisingly solid," notes Thomas Giudici (Auris Gestion).

On the European side, the slowdown in the pace of price increases, although noticeable, does not mean a "pivot" in the sense of Nomura, which notes that "core inflation remained strong and relative to core price movements in November". For the Japanese bank, "this will be a cause for concern for the ECB Governing Council members". "As much as French industrial production [which] collapsed in October, suggesting a weak GDP result in the 4th quarter. The Eurozone's second largest economy "may have entered a recession in the current quarter."

For the ECB, Ulrike Kastens, Economist Europe at DWS, agrees: "the focus should be on the base rate (unchanged, for its part) rather than on the headline rate. And the headline rate will remain well above the ECB's target due to wage increases, labour shortages and cost-induced price increases. In this respect, the ECB has yet to raise interest rates, even in restrictive territory. DWS expects that key interest rates will be raised by a further 150 basis points in the coming months. The deposit rate should then be 3%".

Today, the monthly change in German industrial orders (+0.7%) in October has largely exceeded expectations.

Right now, the pair is trading at $1.0510.

KEY CHART ELEMENTS
Volatility remains high on the spot market, which is tracing a broad consolidation, the structure of which remains to be defined, around $1.0300. A continuation of these nervous oscillations is the preferred option, a scenario that is not very attractive for taking positions. We prefer to stay out of the spot for the time being. The limits of the flag are clearly identified, between $1.0240 and $1.05. The formation, in the long term, of a diamond pattern is not excluded.

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

Our entry point is $1.0518. The price target of our bearish scenario is $1.0101. In order to preserve the capital invested, we advise you to position a protective stop at $1.0596.

The expected return on this forex strategy is 417 pips and the risk of loss is 78 pips.