EUR/USD: the ZEW index plunges

A timid Monday technical rebound was not enough to revive the Euro, as the war in Iran and the Middle East entered its third week. The overall loss of risk appetite and the now chronically firm price of crude oil favored the Dollar. This situation puts central banks in a difficult position, as they must contend with the risk of inflation just as the economy was starting to recover, particularly in Germany. Moreover, the ZEW index of confidence in the Eurozone's largest economy has just fallen back into negative territory.

"The surge in energy and fertilizer prices risks triggering short-term inflationary pressures that will encourage the postponement of planned interest rate cuts. In the United States, the Federal Reserve estimates that, on average, a 10% rise in oil prices leads to a 22 basis point increase in the Consumer Price Index. This can also raise inflation expectations. For now, they are contained. Obviously, the longer energy prices remain high, the more of a headache this will become for central banks, especially as several countries, notably the United States and the United Kingdom, are experiencing a slowdown in the labor market," explains Chris Dembik, investment strategist at Pictet AM.

The Fed concludes its Federal Open Market Committee (FOMC) meeting today, and the European Central Bank its Governing Council meeting tomorrow.

"It is in a particularly dense geopolitical and economic fog that the major central banks are preparing to meet this week. The Fed, the ECB, and the BoE are expected, for the moment, to avoid any hasty decisions and wait for greater clarity. Markets will nevertheless scrutinise their statements closely, particularly their assessment of the inflation risk ? or even the risk of stagflation," adds Roma Ballin, Bond Manager at Auris.

Foreign exchange traders are therefore continuing to monitor developments in the Middle East conflict. The United States bombed Kharg Island in Iran over the weekend. "This is particularly significant because approximately 90% of Iran's crude oil exports are shipped there," writes Deutsche Bank.

"For now, Trump has stated in a message that he has chosen not to destroy the oil infrastructure, but he also said he would reconsider if Iran interfered with the passage of ships through the Strait of Hormuz," the German bank continued.

"Beyond the issue of interest rates and inflation, another key aspect of the Fed meeting will be the evolution of growth and employment projections for 2026, in this context of heightened geopolitical tensions. These projections are released quarterly and will be updated Wednesday evening," explains Alex Baradez, Head of Market Analysis at IG France.

"The ECB meeting will also be highly anticipated on Thursday, given several significant statements made since the start of the military intervention in Iran. There is, of course, Christine Lagarde's statement: 'We will do everything necessary to ensure that inflation is under control and that the French, the Europeans, do not experience inflation increases of the kind we saw in 2022 and 2023."

Published this morning, the "ZEW," Germany's economic sentiment index, fell into negative territory at -0.5. And this despite the already pessimistic consensus forecasting a much smaller decline, from 58.3 to 39 points.

"The ZEW indicator has collapsed. The escalation in the Middle East is driving up energy prices and intensifying inflationary pressures. This increases the risk of a slowdown in the German economic recovery. The magnitude of these effects will depend on the intensity and duration of the conflict. Financial market experts doubt a swift resolution to the conflict," explains Professor Achim Wambach, President of the ZEW.

Right now, the EUR/USD is trading at $1.1536.

KEY TECHNICAL ELEMENTS

Monday's sharp drop ends a period of consolidation above a moving average (the "100-day" average) which has just been decisively broken. The signal is negative before the decisive test of the 200-day moving average (in brown). This long-term trend line was broken sharply on 3 March, amid significant volatility.

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

Our entry point is at $1.1510. The price target for our bearish scenario is $1.1013. To protect your capital, we advise placing a stop-loss order at $1.1621.