EUR/USD: tonight at 20:00 is not to be missed

Here we are! The Fed will lower its key rates today, that's almost certain. But to what extent? Hit hard at the beginning of the cycle, or start the easing process flexibly: that's the challenge of this FOMC, which will be accompanied, as every quarter, by valuable indications: new economic projections and dot plots.

"Finally!", also impatiently says Chris Dembik, investment strategy advisor at Pictet AM. "The Fed will begin its monetary easing cycle this Wednesday. But not everyone agrees on the extent of the first rate cut. On the one hand, there are the pessimists who see the American economy on the brink of recession and argue in favor of a 50 basis point cut. On the other hand, there are the realists, of which we are one, who consider that the American economy is doing well."

"Bill Dudley wants the Fed to hit hard at the start of the rate cut cycle," notes Alexandre Baradez (IG France). "The former president of the New York Fed" believes that "a 50 basis point cut would fit well with the next series of economic projections from Fed officials, which they will publish this week. The markets expect a total cut of at least 100 basis points by the end of 2024. If the Fed only makes 25 now and plans an additional 50 at one of its next two meetings this year, it will send a "hawkish" signal"

The CME Group's FedWatch tool puts the probability of a 50 bps cut in Fed Funds remuneration at 64%, compared to 68% yesterday.

This rebalancing is evidence of uncertainty. "Market uncertainty about the Fed's decision is the highest in over 15 years," observes Xavier Chapard, strategist at LBPAM, this Wednesday morning. As a corollary to this significant uncertainty, the market has a good chance of being surprised, in one direction or another.

"The market anticipates a 40 basis point (0.4 percentage point) rate cut, i.e. a probability only slightly above 50% of a 50 basis point cut, rather than 25 basis points. So the surprise will be more than 10 basis points, down or up, on short-term rates in the coming days. The Fed had guided market expectations better even when it raised its rates by 75 basis points four times in a row, in 2022," says Xavier Chapard.

The Fed and Jerome Powell will therefore be walking on eggshells tonight. "Poor communication could increase risk aversion on the markets, despite a larger-than-expected rate cut," warns Xavier Chapard. This would be detrimental first and foremost for the Euro, the benchmark barometer of risk appetite on the financial markets.

On Tuesday, in the statistical chapter, operators learned yesterday morning of the ZEW index of confidence in the German economy, the first in the European Union, but faltering on the industrial level, its historical strong point. The index came out in free fall at 3.6 points.

"The hope for a rapid improvement in the economic situation is visibly fading. In the latest survey, we are once again seeing a significant decline in economic expectations for Germany. The number of optimists and pessimists is now balanced. Although the decline in economic expectations for the eurozone suggests an overall increase in pessimism, the decline in expectations for Germany is significantly greater. Most respondents seem to have already factored the ECB's interest rate decision into their expectations," comments ZEW President Professor Achim Wambach.

In the US, if we exclude automobiles from the basket, retail sales in the United States fell by 0.1% month-on-month in August, missing an optimistic target of +0.2%. As for the monthly federal report on American industry, it is very satisfactory, both in terms of production (+0.8%) and capacity utilization (78%).

So, forex traders, see you at 8:00 p.m. for the monetary policy decision itself, the dot plots and the updated economic projections, then at 8:30 p.m. for the press conference.

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) which 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 $1.1139.