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#1 15-05-2023 16:10:31

johnedward
Admin & Trader
From: Paris - France
Registered: 21-12-2009
Posts: 3614
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EUR/USD: A barometer for risk appetite

EUR/USD: A barometer for risk appetite


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The EUR remains in a short-term downtrend against the USD, in a nervous market for all risk asset classes.

The challenge of this market sequence is to refine the relative trajectories of Fed Funds and key rates in the Eurozone over the next few 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 Will Gerlach, Iban First's Regional Director for France and the UK.

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 rises dampen the economy and bring inflation down."

The dynamics of retail sales will be scrutinised tomorrow, especially as on Friday traders had to digest the very disappointing preliminary data from the University of Michigan's consumer confidence index (U-Mich index). In the immediate aftermath, the Empire State manufacturing index collapsed to -31.9, completely missing the expectations of the trading rooms. The index, which has been very volatile since the beginning of the year, is at its lowest since January.

Right now, the EUR/USD is trading at $1.0870.

KEY CHART ELEMENTS
The exit from the ascending channel, identified and fully validated, 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 $1.0875. Our bearish scenario price target is $1.0551. In order to preserve the capital invested, we advise you to place a protective stop at $1.0976.

The expected return on this forex strategy is 324 pips and the risk of loss is 101 pips.

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