EUR/USD: A 23.7% probability of a Fed Funds increase... in November

The powerful monetary institution led by J Powell must be tying itself in knots, while the dynamics of crude prices reshuffle the cards on the process of normalisation of inflation, hampering the chances of a soft landing of the American economy.

“It seems certain that the Federal Reserve will leave its rates unchanged at the September 20 meeting,” says Manuel Auboyneau, Managing Partner of Amplegest. "Is this the end of the cycle of rate increases as hoped by investors? Doubt remains about the November meeting and the Central Bank should consciously maintain it to give itself all the possibilities."

Indeed, the CME's FedWatch tool puts the probability of a status quo on this deadline at 1%, and the probability of a 25bp increase in Fed Funds in November at 27.2%.

“In recent weeks, the market narrative has again shifted from optimism that inflation is under control to fears of a re-acceleration of inflation fueled by robust consumer data and a rise in oil prices. Consumer resilience has been surprising, and this period of volatility and uncertainty could last for some time,” says Matt Morgan, Head of Fixed Income, Jupiter AM.

In terms of stats, there were no surprises on Tuesday regarding consumer prices in the Euro Zone, excluding food, energy, alcohol and tobacco in final data for August, up 5.2% year-on-year, in line with initial estimates.

Right now the EUR/USD is trading at $1.0659.

KEY GRAPHIC ELEMENTS

The almost complete retracement of July's gains does not militate at this stage for a continuation of the advance of the currency pair, without formally excluding it. This retracement, by its magnitude, weakens the bullish message then delivered over a good part of the month 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 - now validated - of the 50-day moving average by its 20-day counterpart (in dark blue), at an important angle. The short position will be retained as long as the latter gravitates below the first. The advantage of this investment plan is the discipline that it inherently induces.

MEDIUM TERM FORECAST

Considering the key graphical factors that we have mentioned, our opinion is negative in the medium term on the EUR/USD.

Our entry point is at $1.0695. The price target for our bearish scenario is at $1.0436. To preserve the invested capital, we advise you to position a protective stop at $1.0766.

The expected profitability of this strategy is 259 pips and the risk of loss is 71 pips.