EUR/USD: traders are tired of hearing the word inflation

The EUR/USD is now discovering a new framework of oscillations, not without volatility, while traders digest the last monetary policy meeting of 2023, a meeting which will have reserved its share of surprises. "The Fed made a significant change in communication by indicating that the possibility of rate cuts had been discussed. This appears premature given the resilience of growth, a robust job market and inflation still high", say OSTRUM AM strategists.

"The ECB, for its part, remained cautious due to the strong increase in unit labour costs. It is waiting for data from the first half of 2024 to judge the evolution of salaries," they continue before concluding that "a major divergence change has thus taken place between the Fed and the ECB. Despite the ECB's efforts to contain market expectations, the latter have retained the significant change in communication from the Fed and anticipate rate cuts that are still too aggressive."

It is this scale of difference between hopes, anticipations, intentions of the major central banks and reality when the time comes, which will give direction to the currency pair in the coming months.

?Analysts are ignoring persistent inflationary pressures," warns Christ Dembik, a strategy 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."

Yesterday in Monday's stats, the IFO of the business climate in Germany came out lower, below expectations, at 86.4. The cursor remains blocked in the event of a "crisis" in the "economic cycle clock" tool provided by the institute. Immediately, prices in the Euro Zone in November have just been confirmed in final data by EuroStat. Excluding food, energy, alcohol and tobacco, prices increased by 3.7% at an annualised rate.

For the rest of the week, traders will be particularly attentive to the release of the PCE index, the preferred gauge of the American Federal Reserve (Fed), which will be published Friday afternoon. Without forgetting the consumer confidence index (Conference Board) tomorrow.

Right now, the EUR/USD is trading at $1.0957.

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 $1.0934. 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 240 pips and the risk of loss is 79 pips.