EUR/USD: Appetite for risk is contracting

The geopolitical risk in the Red Sea, combined with the liquidation of the number two in the political branch of Hamas, weighs on the appetite for risk on the financial markets. One of the most reliable barometers of this appetite, the euro, continued its downward movement against the dollar, and returned to levels which had not been relevant since 18 December.

"If the inflation / central banks theme should naturally continue in 2024, this new year will not be able to ignore, once again, (geo)political risks as the subjects are numerous in the four corners of the globe" warns Thomas Giudici, head of the bond management of Auris Gestion. "In the Middle East first of all, where we thought the conflict was quite limited but which could ultimately have more repercussions on the economy than initially anticipated: tensions in the Red Sea have in fact increased a notch in in recent days with the entry of an Iranian warship into the area, reviving fears of an extension of the conflict, the day after American strikes on three Houthi ships, in response to attacks on the carrier Maersk, in part of the multinational naval force responsible for protecting ships in the area."

"After taking a back seat for a while, the war in Ukraine is also coming back to the forefront with the recent intensification of bombings," continues Mr. Giudici.

At the same time, the greenback is regaining some lost feathers after the probabilities of a loosening of the monetary tap from March have contracted slightly, according to the CME's FedWatch tool. Traders still mostly see the Fed starting to lower the yield of its Fed Funds in the very short term, from the FOMC in March. Especially after the publication at the end of last year of a downward revision of GDP in Q2 and a very clear slowdown in inflation in the sense of PCE, the Fed's preferred measure in its assessment of price dynamics.

It is in this context that currency traders will read the Fed Minutes at 20:00 (CET), a traditional chronological report of the debates of the last US monetary policy meeting. Also to be followed, in the US, the ISM manufacturing PMI and new job offers (JOLTS) at 16:00. Yesterday, the industrial PMIs in the Eurozone came out with no significant difference compared to the first estimates, at 44.3, versus 44. This is a 7-month high.

Right now, the EUR/USD is trading at $1.0920.

KEY CHART ELEMENTS
A potential decline is emerging towards the 50-day long average (in orange), the direction of which remains clearly bullish.

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 $1.0925. The price target for our bearish scenario is at $1.0763. To preserve the invested capital, we advise you to position a protective stop at $1.1013.

The expected profitability of this strategy is 162 pips and the risk of loss is 88 pips.