EUR/USD: Global geopolitics and German politics on the menu

The EUR ultimately failed to hold its own against the USD in the wake of the early elections in Germany.

"The victory of the CDU/CSU in Germany is positive for the markets", says Cesar Perez Ruiz, Head of Investments and CIO at Pictet Wealth Management: "a modest budgetary expansion remains possible, despite the risk of seeing the small parties constitute a blocking minority. As a guarantee of stability, a two-group coalition associating the CDU/CSU and the SPD (social democrats) is emerging."

Especially since, as Thomas Giudici, Head of Bond Management at Auris Gestion, points out, "the failure of the FDP (liberals) and the BSW (left-wing populists) to enter Parliament should facilitate the formation of a coalition. Our German friends are generally more effective than us in this exercise."

The main issue is naturally a relaxation, or even the end of the budgetary "golden rule" which had the effect of a straitjacket during O Scholze's mandate. A modification of the "debt brake" rule remains possible, but it is unlikely that it will materialise before next year, if not later" is however keen to qualify David Zahn, Head of European bond management at Franklin Templeton.

German industry, erected as a model, although still powerful, has lost its splendor in recent years, during which "the main pillars of Germany's growth model have become increasingly fragile. This model was based on a globalised and secure world, where trade was relatively free. This situation began to change after the global financial crisis, but the pace of change has been accelerated by successive global shocks that have affected Germany", for Lowie Debou, Fixed Income Fund Manager at DPAM.

The CDU-CSU is expected to join forces with other parties to form a government coalition. Economists believe that the most likely scenario remains a grand coalition between the CDU/CSU and the SPD (socialist). The environmentalists could possibly join the government, which would result in a so-called "Kenya" coalition (black-green-red, the colors of the three parties).

In addition, currency traders are keeping an eye on Ukraine, as unpopular French President Macron is traveling to Washington to try to put Europe back in the diplomatic game, in this case that of peace negotiations in Ukraine, or failing that, a ceasefire or a truce in the fighting. "I think it [a truce] could be concluded in the coming weeks," France's unpopular leader said in an interview on FoxNews.

On the statistical front on Monday, currency traders took note of the consumer prices (CPI) in final data for the month of January, in the Eurozone. Excluding food, energy, alcohol and tobacco, prices rose by 2.8% on an annual basis, in line with initial estimates. To follow at 4:00 p.m. this Tuesday, the sacrosanct consumer confidence index (Conference Board), expected to contract very slightly to 102.8. This is the main event this Tuesday, an event that will allow us to gauge, after the U-Mich index and the PMI barometers, a possible turning point in the health, still flourishing at this stage, of the American economy.

Right now, the EUR/USD is trading at $1.0506.

KEY CHART ELEMENTS
The 50-day moving average (in orange) continues to constitute a solid technical and graphic barrier. In the shorter term, it is even its 20-day counterpart (in dark blue) that acts as dynamic resistance. And this without the RSI oscillator positioning itself in the oversold zone. In the immediate future, the currency pair is tracing a negative harami structure in the upper part of the Bollinger bands. Once the perfect parity is reached, namely $1 for 1 euro, an energetic buying reaction of contestation could then take place.

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 $1.0468. The price target of our bearish scenario is at $1.0001. To preserve the capital invested, we advise you to position a protective stop at $1.0611.

The expected return on this Forex strategy is 467 pips and the risk of loss is 143 pips.