EUR/USD: the spread between French and German government bonds are under scrutiny

The pullback (graphic rejection) on $1.0550 is immediately followed by a downward movement of the single currency, even as the specter of a period of strong instability in France gains ground. The "concessions" made on the budget by Prime Minister Mr. Barnier are not considered sufficient by the leader of the RN party in the Assembly, which therefore leaves the doubt of a vote of censure against the government, following the "forced passage" of the vote, thanks to article 49.3, which could be used as early as this afternoon.

A glance at the OAT/Bund spread allows, at this stage, Alexandre Baradez (IG France), to put the situation into perspective. "At a little less than 90 basis points on this Monday morning, we cannot consider the situation as a situation of panic but rather as a situation of nervousness and vigilance of the financial markets."

The analyst is keen to point out that "in November 2011, during the debt crisis in the Eurozone, this spread rose to 190 basis points, i.e. a 2% difference between the two rates. And for the most fragile countries in the Eurozone at the time, such as Italy for example, this spread had even risen to nearly 550 basis points. Even worse, Portugal, whose 10-year rate had diverged by...1550 basis points from the German 10-year, i.e. a difference of more than 15%! Not forgetting, finally, the ultimate risk with the difference of...3800 basis points (!) between the 10-year rates of Greece and Germany in April 2012."

Let's zoom out a bit to see that, basically, there is no major change of framework this morning. Europe's economic disconnect with the United States is getting stronger, translating into a disconnect in the single currency on exchange rates. Christopher Dembik, investment strategy advisor at Pictet AM, points out that it is "this performance differential between the two sides of the Atlantic that largely explains the recent fall of the euro. No need to look any further. The flows fleeing Europe and taking refuge in the United States are favoring a structural decline in the EUR/USD."

Furthermore, the appetite for risk, directly correlated to the single currency, remained thwarted by Trump's recent remarks on foreign trade. While we knew that the 47th President of the United States is offensive on customs tariffs, very concrete declarations of intent have shaken the Asian and European stock markets.

He wants to impose customs duties of 25% on all products from Mexico and Canada and increase those by 10% for products imported from China. Trump justifies these trade retaliatory measures in retaliation for illegal immigration and drug trafficking, particularly Fentayl, a powerful drug that is wreaking havoc in the US.

"As everyone knows, thousands of people are flocking to Mexico and Canada, bringing with them crime and drugs at levels never seen before," he said. "This tariff will remain in effect until drugs, especially Fentanyl, and all illegal aliens stop invading our country!", continued the president-elect.

In the immediate future, currency traders have just learned of the PMI industrial activity barometer in the Eurozone at 45.3 points, with no deviation from initial estimates. Remember that a score below 50 points means a contraction in activity. Watch the US ISM manufacturing index at 48.9 at 16:00 (EU time).

Right now, the EUR/USDis trading at $1.0521.

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. Since the fragile supports break one after the other. Negative opinion maintained. Nevertheless at this stage the decline, the formation of a technical rebound cannot be long in coming, we are watching for signs.

Right now, though, the EUR/USD is completing a textbook pullback (chart rejection) on $1.0550.

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 $1.0516. The price target of our bearish scenario is at $1.0101. To preserve the capital invested, we advise you to position a protective stop at $1.0676.

The expected profitability of this strategy is 415 pips and the risk of loss is 160 pips.