EUR/USD: Monday's market reaction is already behind us

The euro's gains at the start of the week were abruptly halted against the dollar after US "self-defense strikes" effectively violated the ceasefire between Washington and Tehran. The United States specifically referred to the strikes as "self-defense strikes" to "protect its troops from threats posed by Iranian forces."

"The targets included missile launch sites and Iranian vessels attempting to lay mines," the US Central Command (Centcom) said in a statement.

"Between the exchange of draft agreements between Iran and the US and threats of military escalation if an agreement is not signed quickly, the prospects for resolving the conflict remain uncertain. And the Strait of Hormuz remains largely closed while oil stocks, which have helped mitigate the impact so far, are rapidly declining. Meanwhile, the price of oil remains between $100 and $110, a level that doesn't trigger an immediate reversal in the global cycle but is increasingly weighing on the economic outlook," summarises Xavier Chapard, Deputy Head of Research at LBPAM, who also discusses the PMI indicators, a barometer of economic activity, published last week in the Eurozone.

For the services sector, the score for the entire Eurozone fell well below the 50-point mark, at 46.3, thus indicating a severe contraction in activity.

"The services sector is bearing the brunt of the war's impact on the cost of living, with rising energy prices in particular causing a drop in demand," commented Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, who also analyzes the "composite" data (which also takes into account the industrial score): "the significant supply disruptions caused by the war." These tensions are intensifying, with the survey reporting increasingly significant delivery delays. These supply chain strains not only threaten economic growth in the coming months but also risk exacerbating inflationary pressures.

"Given the rise in price indices recorded in May, we can already anticipate an inflation rate close to 4% in the coming months. Combined with increasingly numerous signs of a return to contraction in the eurozone, this trend places the ECB in an increasingly delicate situation," adds Mr. Williamson.

The German industrial sector alone has symbolically fallen back below 50 points, to 49.8. It's worth noting that the 50 threshold, by definition, separates expansion from contraction in economic activity. The services sector alone for France even fell below 43!

Right now, the EUR/USD is trading at $1.1635.

KEY TECHNICAL ELEMENTS
From a technical perspective, the EUR/USD is now encountering a pivotal zone. After erasing much of its decline related to the acute phase of the conflict, it is trading near the upper limit of its range. This configuration indicates compression. Volatility and marked hesitation among market participants are currently preventing them from triggering a sustained upward move. In the absence of a clear catalyst - whether macroeconomic, monetary, or geopolitical - the pair remains contained below this major resistance level ($1.1824), in a wait-and-see phase that could lead to a more directional move once this equilibrium is broken.

The hanging man candlestick pattern of 10 May sent a negative technical signal, which resulted in a downward acceleration in the form of a break below the 200-day moving average (in brown).

A temporary rebalancing of forces is underway, before a bearish restart.

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

We will maintain this neutral stance as long as the EUR/USD remains between the support level at $1.1608 and the resistance level at $1.1765.