EUR/USD: Traders have a lot to consider

The euro continued to decline against the dollar on the eve of Moody's verdict on France's rating.

"It's worth remembering that at Moody's, France has an Aa3 rating with a "stable" outlook. In a gradual adjustment process, a rating agency first lowers the outlook from "stable" to "negative," and then decides to downgrade the rating if no improvement in the outlook is observed," says Alexandre Baradez, Head of Market Analysis at IG France.

So far, the rating agency "sanctions" have weighed more heavily on the single currency than on equities, with the CAC 40 even allowing itself the luxury of setting new all-time highs.

"But on Friday, Moody's could easily decide to skip the outlook downgrade step and move directly to a rating downgrade. Indeed, a rating agency can lower a credit rating without first changing the outlook. S&P, Moody's, or Fitch can lower a rating due to sudden events (such as financial difficulties, policy changes, or market shocks) without first adjusting the outlook."

Investors are pricing in the Trump administration's announcement of a new wave of sanctions against the Russian oil sector. The European Union has also tightened its own sanctions on Russian hydrocarbons.

"These are the first material US sanctions against Russia introduced since Trump returned to the White House in January and mark a radical change in tone from last week, when the two sides discussed a possible meeting in Budapest between Trump and Putin" to discuss the Ukraine issue, Deutsche Bank emphasises.

Finally, geopolitics partly explains the loss of appetite for measurable foreign exchange risk. Trump stated Tuesday evening that he did not want to meet with Russian President Vladimir Putin if the meeting served "no purpose." "I don't want to waste time, so we'll see what happens," he told the press, according to comments relayed by Agence France Presse (AFP).

The meeting between the two men in Budapest, initially scheduled for two weeks, therefore appears to be postponed in light of this statement.

Forex traders will have a lot to do between now and the end of the month, as two monetary policy meetings loom: the ECB's Governing Council and the Fed's Monetary Policy Committee.

Nomura economists expect "the ECB to leave its deposit rate unchanged at 2% at its October 30 meeting, [and] that the ECB will continue to focus on the data and move forward from meeting to meeting, without changing its positions. ECB President Christine Lagarde is expected to reiterate that the ECB is well positioned with rates at current (i.e., neutral) levels to address the ongoing uncertainty related to US policy."

For the Fed, IbanFirst experts expect "two additional rate cuts within six months, to 3.75% versus 3.50% for the futures markets; due to the persistent inflation risk. We believe the inflationary effect of the US tariff policy will be less significant than initially anticipated. However, it will not be painless. Once the impact of the shutdown on the publication of statistics is estimated, we should begin to see a rebound in inflation in the fourth quarter, which should encourage the institution to be cautious."

It should be remembered that the shutdown deprives foreign exchange traders of valuable benchmarks, particularly on employment and prices.

Right now, the EUR/USD is trading at $1.1604.

KEY CHART ELEMENTS
The previously prevailing bullish oblique (in black on the chart) has now been broken, with a confirmatory pullback. A negative view is proposed below this oblique, while the relative strength index is collapsing. The 20-day moving average (in dark blue) has just broken at a significant angle the trajectory of its 50-day counterpart (in orange).

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

Our entry point is at $1.1589. The price target for our bearish scenario is $1.1013. To protect the invested capital, we recommend placing a protective stop loss at $1.1731.

The expected return on this strategy is 576 pips and the risk of loss is 142 pips.