EUR/USD: US PMI index disappoints, Germany's IFO reassures

At the end of a week with high stakes for the EUR and USD, the bullish bias of the spot remains unchanged, after the relatively firm tones adopted by the major money makers on both sides of the Atlantic. After the Fed on Wednesday, it was the ECB's turn on Thursday to complete its last Governing Council meeting of the year.

Forex traders were nervous at the time of the press conference following the various monetary announcements. A press conference "characterised by particularly hawkish language", according to ING economist Francesco Pesole, "with Christine Lagarde explicitly underlining that markets are underestimating the monetary tightening needed to bring inflation back to its target."

This leaves "uncertainty about the pace and magnitude of ECB rate hikes, given the large uncertainties surrounding inflation dynamics," for Konstantin Veit, portfolio mgr at PIMCO. "The market is currently pricing in a final rate of around 3.25%, which does not seem unreasonable after the hawkish statements."

The big questions are the shape of the Fed Funds curve (flatter? longer?), the value of the terminal rate, and risks of the US entering a recession, which were underlined on Friday by the first PMI estimates for December. Missing the target, the US services PMI came in sharply lower at 44.3 and the industrial component at 46.3.

Chris Williams, Chief Business Economist at S&P Global Market Intelligence, provided the following insights: "The survey data suggests that the Fed's rate hikes are having the desired effect on inflation, but that the economic cost is rising and recession risks are increasing substantially.

In the immediate term, Germany's IFO business climate index, up to 88.7, above expectations, is helping the single currency resist profit taking.

At midday on the foreign exchange market, the Euro was trading at around $1.0605.

KEY CHART ELEMENTS
The publication of a marked slowdown in US inflation is pushing down the dollar as much as it is supporting the risk asset that is the euro. In this sense, the anticipation of a diamond congestion pattern does not make more sense, and the 20-day moving average (in dark blue) is playing its supporting role. Positive view maintained above.

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 $1.0615. The price target of our bullish scenario is $1.1189. In order to preserve the capital invested, we advise you to place a protective stop at $1.0434.

The expected return on this strategy is 574 pips and the risk of loss is 181 pips.