EUR/USD: A fully validated triple-peak

The euro continued its downward movement against the dollar, proof of a certain prudence of traders this week, where macroeconomic indicators will have illustrated a contained slowdown of the principal economic powers of the planet, on bottom, nevertheless, of persistent fears on the American banking sector. The latest hot news on the subject is that PacWest, identified as the weakest link in the system, announced a fall in its deposits last week.

The challenge of this market sequence is to fine-tune the relative trajectories of Fed Funds and Eurozone interest rates over the coming months. "With the Fed seemingly in "pause mode" while other central banks, notably the ECB, continue to raise rates, this new report is not a game changer," says William Gerlach, Regional Director for France and the UK at Iban First.

Juliette Cohen, Strategist at CPR AM, explains this gap in the monetary process between the Fed and the ECB.

"The Fed started its rate hike cycle in March 2022 and raised its key rates by 500 bps. Barring any surprises on future inflation data, it is not expected to raise rates again. Indeed, the Fed has taken note of the tightening of credit conditions, which was already at work with the bank failures of March and April."

The ECB is expected to continue its monetary tightening until July and to raise rates twice by 25 bp. In making its decision, it will focus on three factors in particular: the inflation outlook, the dynamics of underlying inflation and the speed with which rate hikes dampen the economy and bring inflation down.

Right now, the EUR/USD is trading at $1.0889.

KEY CHART ELEMENTS
The identified and fully validated exit from the ascending channel is accompanied by a triple top structure (14/04, 26/04, 04/05)*, which supports our bearish scenario on the leading currency pair. We are now monitoring the relative dynamics of the moving averages, keeping in mind that the price/ROI divergence has already sent a pessimistic message.

* We will appreciate the high shadows of the corresponding candles on each of these dates.

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 $1.0910. The price target of our bearish scenario is $1.0711. In order to preserve the capital invested, we advise you to place a protective stop at $1.0991.

The expected return on this forex strategy is 199 pips and the risk of loss is 81 pips.