EUR/USD: the euro is subject to Trump's expansionist policy

Although slightly down around 4.30%, the yield on 10-year US government bonds remained particularly firm, a direct consequence of expectations of an expansionary and potentially inflationary policy by Donald Trump as soon as he takes office at the White House on 20 January.

"A more flexible fiscal policy, stronger economic growth and higher consumer prices in the event of significant tariffs would probably force the US Federal Reserve (Fed) to limit the easing of its monetary policy compared to initial expectations," warns Dr. Schmidt - Economist and Dr. Holger Schmieding - Economist at Berenberg. "It would therefore be possible that the Fed would only lower its key rate twice in total this quarter and next quarter, instead of four, by 25 basis points each time. In this case, the range of key rates at the end of the easing cycle would be 4.25% to 4.5% instead of the 3.75% to 4.0% currently planned."

The Fed, in fact, was finishing a new meeting of the Monetary Policy Committee yesterday, with the name of the next President of the United States in mind and certainly. The Federal Reserve led by J Powell decided, unsurprisingly, to lower the yields on its Fed Funds by 25 basis points.

"Trump's potentially expansionist economic policy could encourage the Fed to adopt an even more restrictive stance to counter inflation," adds Andrea Tueni, Head of Sales Trading at the Saxo Banque France office.

Because if inflation expectations are to be revised upwards, it is the anticipation of the shape of the rate trajectory that is mechanically modified.

"Inflation expectations and, in particular, real yields have increased since the Fed began lowering its rates in September", for William Zox, Portfolio Manager, Brandywine Global (subsidiary of Franklin Templeton), who does not think that "the Fed will reduce its rates in December or January, but [that] it will be up to the Treasury market to transmit this message to the Fed, rather than the other way around."

On the statistical front yesterday, weekly unemployment benefit registrations came out at 220,000 new units, very close to the consensus, and synonymous with chronic firmness of employment across the Atlantic. A dial that the Fed consults very regularly. On the macroeconomic agenda this Friday, to follow as a priority the preliminary data of the consumer confidence index (U-Mich) at 16:00 (EU time).

Finally, on the European side, the end of the coalition in Germany is an element to take into account, potentially positive in the short term for the DAX, but less readable for the single currency.

"We believe that the prospect of a change of government should not lead to a rise in yields, as additional spending could be expected. Over the next 12 months, we continue to expect a decline in German government bond yields and a slight steepening of the yield curve", deciphers the Chief Investment Officer of DWS, a German asset manager.

Right now, the EUR/USD is trading at $1.0772.

KEY CHART ELEMENTS
The currency pair has just broken out of a wedge pattern in intense volatility, confirming the bearish bias that is now fundamental.

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

Our entry point is at $1.0772. The price target of our bearish scenario is at $1.0371. To preserve the capital invested, we advise you to position a protective stop at $1.0907.

The expected profitability of this strategy is 401 pips and the risk of loss is 135 pips.