EUR/USD: the dollar regains some strength

The euro continues to gain ground against the dollar, against a backdrop of chronic risk appetite, and with the support of a new European fiscal framework. "Such an agreement became urgent, the rules of the Stability Pact had in fact been suspended in the face of the economic crisis linked to Covid but they had to be applied again on 1 January 2024," notes Romane Ballin, bond manager of Auris Management.

"The Stability Pact, enacted at the end of the 1990s, was thus "modernised" in order to be more realistic. The historic thresholds have been maintained: each country will always have to respect the limit of a deficit of 3% of its GDP and debt at 60% However, the new rules are intended to be more flexible and adapted to the situation of each State, which will propose its own budgetary adjustment trajectory over at least four years in order to ensure the sustainability of its debt. This agreement, which must now be adopted by the European Parliament, is good news for the ECB because it will make it possible to limit the expansion of budgetary policies whose inflationary effects are not negligible."

The dollar was under pressure from the market's increasingly strong anticipation of a first drop in Fed Funds yields from March. The CME's FedWatch tool now puts the probability of seeing the American monetary institution lowering key rates at 84.5% as early as March, in the wake of the downward revision of US growth, combined with the publication PCE prices last week.

In terms of statistics, the Richmond Fed's manufacturing index was in the red yesterday (-11), deeper than expected by the market (-4). To be followed as a priority this Thursday across in the US, weekly registrations for unemployment benefits at 14:30 (CET) and current housing sales at 16:00.

Right now, the EUR/USD is trading at $1.0956.

KEY CHART ELEMENTS
The currency pair is in the process of breaking through a chart resistance level at $1.1012. This level would be definitively wiped out in the event of an increase in volatility.

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

Our entry point is at $1.1128. The price target for our bullish scenario is $1.1459. To preserve the invested capital, we advise you to position a protective stop at $1.0939.

The expected profitability of this forex strategy is 331 pips and the risk of loss is 189 pips.