EUR/USD: A timid reaction after a difficult week

Like the main equity indices in Europe, the Euro attempted a timid technical rebound, of dispute on Monday, in the absence of major statistical benchmarks, after a very difficult week marked by a very clear contraction in appetite for the risk. Because of the worrying figures on Chinese foreign trade, the confirmed slowdown of the German economy, formally in recession, and the questions raised by Fitch on the state of health of the American banking system.

Currency traders have also acted on the idea of maintaining federal rates at a high level, on a plateau, for many months, after the publication of the MInutes of the Fed. The document shows, between the lines, that some Fed executives did not formally rule out an even bigger Fed Funds hike in July. For the month of September, a status quo on rates is the scenario that holds the rope, with a probability of 90.50% within the meaning of the CME's FedWatch tool. Tensions in the bond market resulted in a spike in 10-year Treasuries, US Treasury bond yields, to a level not seen since 2007.

This week, the agenda will not thicken until tomorrow with the Richmond Fed manufacturing index and sales of existing homes. As of Wednesday, we can expect shifts in the currency pair if the targets are missed, or exceeded, on the first estimates of the PMI activity indicators. The German industrial component, to be watched like milk on the stove, is expected at a sad 38.6 in the sense of the market consensus.

At midday on the foreign exchange market, the Euro was trading against around $1.0900.

KEY GRAPHIC ELEMENTS
The near total retracement of July's gains does not militate at this stage for a continuation of the advance of the currency pair, without formally ruling it out. This retracement, by its magnitude, weakens the bullish message then delivered over a good part of July. The outcome of the ongoing test of the 50-day moving average (in orange) will be decisive. The bearish message takes shape with the break – in progress – of the 50-day moving average by its 20-day counterpart (in dark blue), at a significant angle.

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 $1.0899. The price target of our bearish scenario is at $1.0693. To preserve the capital invested, we advise you to position a protective stop at $1.0981.

The expected return of this Forex strategy is 206 pips and the risk of loss is 82 pips.