EUR/USD: Interest rate decrease and economic projections

The EUR/USD was trading at a level close to $1.1120, at the dawn of a key week for traders, who will have things to look for on 18 September, with the outcome of a historic Fed Monetary Policy Committee. Historic because it will mark the beginning of the monetary easing process by direct action on rates.

Many issues to remember, since in addition to the "suspense" between a 25 or 50 basis point drop in the remuneration of the Fed Funds, the Fed will provide an update of its economic projections.

"The dot plot, economic projections and Powell?s speech will all be key, but we expect labor market data to ultimately dictate the shape of the cycle. If there are signs of weaker labor demand or rising layoffs, the FOMC will not hesitate to respond forcefully," says Xiao Cui, Senior Economist at Pictet Wealth Management.

The dot plots referred to by the asset manager, called dot plots, are histograms of points published quarterly. Their mechanics are simple: the 12 voting members, on condition of anonymity, record their feelings about the level of Fed Funds for the upcoming deadlines.

Last week, the Governing Council of the European Central Bank ended in a surprise move to loosen the monetary tap again, by 25 basis points. The powerful pan-European monetary institution has lowered (slightly), but for 2024, 2025 and 2026, growth.

Will Vaughan, Associate Portfolio Manager at Brandywine Global (a subsidiary of Franklin Templeton), continues "to think that the ECB will cut rates until it reaches a neutral position around 2%, probably at a pace of once per quarter, with the next reduction in December."

"However, the new macro forecasts published were interesting in that they continue to overestimate growth over the next few years and will continue to be revised downwards over the next few forecast cycles. The ECB's rate-cutting cycle could accelerate if growth continues to disappoint," says the asset manager.

"Mr Draghi's recent report highlights some of the key challenges facing the Eurozone, but spending more than 699 billion EUR per year, as has been suggested, seems unrealistic given the current political climate," notes Will Vaughan, Associate Portfolio Manager at Brandywine Global. "Without significant fiscal changes, it is difficult to see a major growth catalyst emerging in Europe any time soon."

On the statistical front on Monday, the Euro is supported by an overshoot of the target for the monthly trade surplus in the Eurozone, at +15.4 billion euros in July, compared to +16.9 billion euros in June. On Friday, traders learned of a monthly contraction in industrial production in the Eurozone (-0.3%) that was less severe than anticipated (-0.6%), which provides some support to the single currency, in the context of chronic fear over the health of industry in Germany. In the US, preliminary data from the consumer confidence index (U-Mich) slightly beat expectations, coming out at 38.9 points on Friday.

Right now, the EUR/USD is trading at $1.1121.

KEY CHART ELEMENTS
The EUR/USD, in the form of a very clear pullback (graphic rejection), has returned to contact with an oblique line (in black) that materializes the neckline of a bearish shoulder, head and shoulders pattern. Bearish positions will be reactivated as soon as the spot falls below this graphic level.

MEDIUM-TERM FORECAST
In view of the key graphic factors that we have mentioned, our opinion is negative in the medium term on the EUR/USD.

Our entry point is at $1.1123. The price target of our bearish scenario is at $1.0907. To preserve the capital invested, we advise you to position a protective stop at $1.1207.

The expected profitability of this Forex strategy is 216 pips and the risk of loss is 84 pips.