EUR/USD: channeled energy

Very high volatility to report on the EUR/USD, rising sharply on Thursday then falling sharply on Friday. And this is while the president of the NY Fed declared that the members of the monetary policy committee were not, for the moment, talking "really about rate cuts at the moment", on the show Squawk Box of CNBC.

"We are very focused on the question before us, which is, as Chairman Powell said, whether monetary policy is tight enough to get inflation back to 2%. That is the question at hand. to us," he says. These statements therefore contradict the words of Powell, who admitted on Wednesday evening that members of the Fed had discussed rate cuts.

Indeed, on Wednesday at the end of the FOMC, Powell adopted a tone interpreted as rather accommodating, suggesting the idea of a short-term pivot, rather than maintaining the Fed Funds on a plateau.

On Thursday, the ECB completed its Governing Council. "The ECB acknowledged that inflation was falling rapidly, but warned of a temporary recovery in the short term. It also continues to closely monitor the growth in unit labor costs, which are seen as a risk for future inflation," notes Sebastian Vismara, senior economist and strategist at BNY Mellon Investment Management.

Currency traders had to postpone their average expectations of the first drop in European rates by a few months.

"Overall, we have received clear signals that the ECB is about to pivot in 2024, but Ms. Lagarde has tried to dampen speculation about rapid rate cuts," summarises Martin WOLBURG, chief economist at GENERAL INVESTMENTS.

This backlash regarding American monetary policy, combined with uninviting activity indicators in the Eurozone, caused this reversal in the currency pair.

"Analysts are ignoring persistent inflationary pressures," warns Chris Dembik, investment advisor at Pictet AM. "The doubling of super-core inflation (excluding food, energy and housing) in the US in November reminds us that we will still have to reckon with inflation next year. The disinflation process will take time and will certainly limit the room for maneuver of central banks to begin an aggressive cycle of rate cuts."

Concerning the PMI activity indicators, as a first estimate for the current month: if the score, on the scale of the Eurozone as a whole, is close to expectations for the industry (44.1) in in the absence of a bad German surprise, the score for services is however below the consensus, at 48. The Composite index fell from 47.76 in November to 47 in December, highlighting a decline in private business activity in the region for a seventh consecutive month. Excluding the first months of health confinement in 2020, the euro zone recorded its strongest quarterly contraction since the fourth quarter of 2012.

On the agenda today, follow the NAHB index of the American residential market at 16:00 (CET) The agenda will intensify tomorrow with inflation in the Eurozone in the sense of consumer prices.

Right now, the EUR/USD is trading at $1.0909.

KEY CHART ELEMENTS
The complete retracement carried out over the whole week gives even more substance to the broad range evolution scenario, between $1.0693 and $1.1012. The latter was validated by the clarity of the inflection made on Friday 15/12. This resistance level ($1.1012) is significantly reinforced.

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 $1.0911. The price target for our bearish scenario is at $1.0694. To preserve the invested capital, we advise you to position a protective stop at $1.1013.

The expected profitability of this forex strategy is 217 pips and the risk of loss is 102 pips.