EUR/USD: Consolidation pennant invalidated

Against the backdrop of falling crude oil prices, the Euro/Dollar  continued its downward trend. Oil prices continued their decline, battered by Donald Trump's push to reach an agreement with Iran on the nuclear issue. This has eased fears of a US attack on the country and, consequently, disruptions to oil supplies.

As a reminder, last week the US president urged Tehran to conclude a nuclear agreement, stating that "time was running out" before a US attack, after having already hinted at the possibility of intervention in recent weeks in response to the bloody crackdown on the protest movement in the country. Iran, "with its finger on the trigger," was ready to respond to any US attack, retorted the Iranian Foreign Minister. Not only is the country among the top ten oil producers, but it also borders the Strait of Hormuz, through which approximately 20% of global crude oil production passes.

The relative easing of diplomatic tensions is working in favor of the dollar in the short term. Currency traders are also still digesting the name of the person who will succeed John Powell as head of the Fed, pending confirmation by Congress: Kevin Warsh.

"Kevin Warsh's experience at the Federal Reserve, where he earned a reputation as a particularly competent crisis manager with a solid understanding of financial markets, as well as his extensive experience in independent monetary policy analysis, make him a credible candidate. As chairman, he will most likely advocate for interest rate cuts, in line with our scenario of two 25-basis-point cuts by the end of the year. But he is unlikely to be able to fundamentally change the Fed's operating framework or reduce the size of its balance sheet, which would significantly limit the potentially restrictive scope of his policy," analyses Luke Bartholomew, Deputy Chief Economist at Aberdeen Investments.

After a largely predictable FOMC meeting on 27 February, it is now the ECB's turn to convene its Governing Council, which will conclude on Thursday with a very likely status quo on key interest rates, the "rent" for the euro, at 2.15% for the interest rate on the main refinancing operations that provide the bulk of liquidity to the banking system. The DFR will remain at 2%.

"As we approach the February meeting, we expect the ECB to keep the deposit facility (DFR) rate unchanged for the fifth consecutive time, at 2%," anticipates Konstantin Veit, portfolio manager at PIMCO. With inflation broadly in line with target, growth close to trend, and labor markets still robust, the ECB has little reason to adjust its policy at this stage. Although medium-term inflation risks are still being debated, we believe the Governing Council will disregard the slight deviations from target due to energy and maintain current rates for the foreseeable future, as wage and services inflation continues to normalize.

Right now, the EUR/USD is trading at $1.1811.

KEY TECHNICAL ELEMENTS
The triangle consolidation pattern of January 28 and 29 has been invalidated, and our long positions on the EUR/USD have been suspended. Our outlook is neutral pending further clear technical signals.

MEDIUM-TERM FORECAST
Based on the key technical factors mentioned above, our medium-term outlook for the EUR/USD is neutral.

We will maintain this neutral stance as long as the EUR/USD exchange rate remains between the support level at $1.1608. and resistance at $1.2214.