EUR/USD: 4.7% probability of a Fed Funds rate increase!

The EUR/USD continued its evolutions, compressed within a bevel (wedge), with the approach, this evening, of a new meeting of monetary policy of the Fed.

“The status quo is expected after several FOMC members floated the idea of a pause in June to allow time to observe more macroeconomic data, before a potential new rise in July even if this could disturb the message from the Fed", says Thomas Giudici, head of bond management at Auris Gestion.

The Fedwatch tool, developed by CME Group, allocates a probability of 95.3% of a status quo on the remuneration of Fed Funds, within a limit of between 5 and 5.25%. This probability was around 75% before the publication of the CPIs yesterday.

In detail, consumer prices in annualised data in April rose by 4%, versus 4.1% expected and 5% in March, in the broadest product base. On the other hand, no deviation to report compared to the target for prices, excluding food and energy, in monthly data (+0.4%). The "core" figure, that is to say excluding food/energy prices, stood at 5.3% over one year, in line with the expectations of economists polled by Wall Street Log.

“Investors currently believe that the next hike will be the last in the cycle and that monetary easing will begin in early 2024,” note strategists at Muzinich & Co.

As for the ECB, it's completing a new Board of Governors tomorrow, and even if it is not at the same stage of its cycle, the problem is close: to avoid paralysing a slowing economy - this is particularly true for the Germany - while continuing to fight against rising prices. Remember that the leading economic power in the monetary union has just entered a technical recession.

“While core inflation in the Eurozone surprised on the downside in May, underlying price pressures remain strong. The Eurozone economy appears resilient, with inflation far too high and an exceptionally tight labour market", says Konstantin VEIT, portfolio manager at PIMCO, who anticipates that "the ECB should raise its key rates by 25 basis points at its meeting in June [tomorrow] to raise them to 3.5% and confirm the end of the asset purchase program (APP) reinvestments."

Right now the EUR/USD is trading at $1.0824.

KEY GRAPHIC ELEMENTS

The 20-day moving average (in dark blue) has just cut downwards the trajectory of its 50-day counterpart (in orange): the bearish message emerges strengthened. Note the importance of the crossing angle of these trend curves. Next intermediate threshold identified: $1.0550, a breach of which would have consequences in terms of occasional downward acceleration. The short position will be held with discipline as long as the 20-day moving average gravitates below its 50-day counterpart (in orange). Immediately a bevel (wedge) concentrates the energy of the spot.

MEDIUM TERM FORECAST

In view of the key graphic factors that we have mentioned, our opinion is negative in the medium term on the EUR/USD parity.

Our entry point is at $1.0805. The price target of our bearish scenario is at $1.0436. To preserve the capital invested, we advise you to position a protective stop at $1.0901.

The expected return of this strategy is 369 pips and the risk of loss is 96 pips.