EUR/USD: The ECB has adopted stricter communication

After a brief rebound in protests, the euro resumed its early decline against the dollar amid a complete loss of risk appetite following a new military escalation in the Middle East.

The massive South Pars/North Dome gas field, the world's largest known gas reserve, jointly operated by Iran and Qatar, was targeted. "This is significant because it marked the first strike against their facilities since the start of the current war," notes Deutsche Bank. On Wednesday, the largest liquefied natural gas (LNG) production site, operated by Qatar, suffered "significant damage" after being struck by an Iranian missile.

The United Arab Emirates and Kuwait indicated today, that they were responding to missile attacks, while Saudi Arabia announced it had intercepted several drones. For its part, the Israeli army announced it was conducting new strikes on Iranian government "infrastructure" in the capital, Tehran. Iranian media also reported that 15 Iranian ships were attacked in a Gulf port.

Currency traders had to contend yesterday with the extremely cautious stance of ECB President Christine Lagarde, who was concluding a Governing Council meeting impacted by the consequences of the war in the Middle East. While the status quo on the interest rate itself surprised no one, the language used in the press release and at the press conference was closely scrutinised.

"The emphasis placed on upside risks to the inflation outlook in the press release, as well as the upward revision of 0.7 percentage points to the inflation forecast for 2026 in the central scenario, reflects the bank's concerns about renewed inflationary pressures and its willingness to respond, if necessary, with interest rate hikes," notes Felix Feather, an economist at Aberdeen.

The ECB "has adopted a more restrictive communication strategy in light of recent developments in the Middle East," says Konstantin Veit, portfolio manager at PIMCO. "The ECB now anticipates inflation significantly above its short-term target, before a gradual return to around 2% over the next year."

"While President Christine Lagarde highlighted the differences with 2022, she also reaffirmed that the ECB would do everything necessary to ensure price stability in the medium term." The economist believes "it is still too early to form a strong conviction about the monetary policy response, given the continued uncertainty surrounding the intensity and duration of the disruptions."

On the economic front, currency traders learned yesterday of the weekly jobless claims (204,000) and the Philly Fed manufacturing index (18), both exceeding expectations. These statistics were overshadowed by the ongoing military escalation in the Middle East.

Right now, the EUR/USD is trading at $1.1562.

KEY TECHNICAL ELEMENTS
The 200-day moving average (brown) was decisively broken, with a subsequent pullback confirming the trend. The 20-day moving average (dark blue) has just crossed below its 50-day counterpart (orange) and the previously mentioned long-term trend line in just a few trading sessions.

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

Our entry point is at $1.1557. The price target for our bearish scenario is $1.1013. To protect your capital, we recommend placing a stop-loss order at $1.1701.

The expected profit of this strategy is 544 pips and the risk of loss is 144 pips.