EUR/USD: Greater volatility on the horizon

The EUR/USD completed its consolidation with a wedge pattern, weighed down by the 20-day moving average (dark blue line), as currency traders remained unsure whether to believe the White House or Iranian authorities regarding alleged diplomatic exchanges.

While Trump maintains he is in negotiations with Iranian representatives, Tehran asserts the opposite and warns that enemy forces are preparing to occupy an Iranian island in the Gulf. For several days, Kharg Island has been mentioned as a possible site for a US intervention, with troops on the ground. However, capturing this island appears difficult for the US, and its potential benefit in reopening the Strait of Hormuz is far from clear.

According to several media outlets, Donald Trump presented a 15-point peace plan to Iran on Tuesday through Pakistan. Iranian television reported that Tehran rejected the plan. The country also hinted at a decrease in tensions, stating that non-hostile ships are now permitted to transit the Strait of Hormuz. Despite these potential advances, Israel continues its strikes in Iran and Lebanon.

"In this volatile context, central banks are proceeding cautiously. The US Federal Reserve (Fed) has opted for the status quo, due to a lack of visibility. Regarding macroeconomic data and the ability to fully assess the impact of the current situation, Jerome Powell admitted: 'We just don't know,'" observes Gianluca Lobefalo, Senior Investment Advisor, Varenne Capital Partners.

"Monetary policy trajectories remain contingent on the evolution of the conflict and its impact on inflation, particularly through commodity prices. Should inflationary pressures return, central banks could be forced to raise interest rates. However, the Fed has greater leeway due to its dual mandate, which requires it to also consider the situation in the labor market," the asset management expert adds.

On the statistical front, currency traders learned on Wednesday of the Ifo Business Climate Index for Germany, which fell to 86.3 points, very close to expectations. The index, which measures the confidence of entrepreneurs and investors in the Eurozone's largest economy, is naturally affected by the consequences of the war in the Middle East. This Thursday, they will focus on the weekly jobless claims figures in the United States, expected to rise slightly to 212,000 new claims.

Right now, the EUR/USD is trading at $1.1547.

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 underlying trend line in just a few trading sessions. The spot price is completing a consolidation pattern known as a wedge and is poised to break down. If this occurs, volatility would increase.

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 $1.1548. The price target for our bearish scenario is $1.1013. To protect your capital, we recommend placing a stop-loss order at $1.1681.

The expected profit for this forex strategy is 535 pips, and the potential loss is 133 pips.