EUR/USD: The ECB's status quo strategy is disrupted

The downward break below $1.16 was fully confirmed on the eve of the next meeting of the ECB Governing Council. This meeting is inevitably impacted by the geopolitical situation and its corollary: the now chronically high price of crude oil and its consequences for inflation, consequences all the more pronounced given that the Eurozone remains heavily dependent on fossil fuel imports.

"The return of inflation should push the European Central Bank (ECB) to raise its rates on 11 June despite the risk of a slowdown in growth in the Eurozone. This dilemma should limit this new round of monetary tightening," according to Raphael Dupuy-Salle, Fixed Income Manager - Listed Assets, Sienna IM.

"This exogenous shock calls into question the status quo policy that the European institution had adopted for the past year. It is clear that with this protracted conflict, the ECB finds itself somewhat trapped between inflation that will continue to rise and economic activity that will begin to slow."

The market is therefore clearly expecting a first rate hike tomorrow, but the key will be to decipher, in the slightest shift in rhetoric, the possibility of a further increase in the euro's value before the end of the year.

Christopher Dembik, Investment Strategy Advisor at Pictet Asset Management, takes a critical view of the ECB's approach, drawing on historical perspective: "In many respects, the ECB is the heir to the Bundesbank. It is still influenced by its ideology and its visceral fear of inflation. After the 1973 oil crisis, the Bundesbank reacted more quickly than other central banks, which allowed it to better contain inflation. Today, the ECB seems to want to follow this precedent. It's not certain that it's right. Unlike the 1970s, everything suggests that current inflation is transient and that its peak could be reached this summer around 3.6%."

The answer and verdict will come tomorrow at 2:15 p.m (EU time). for the interest rates themselves and especially at 2:45 p.m. for the traditional press conference. The press conference, which generally lasts one hour, consists of a speech and a question-and-answer session.

"Politically, three of the four major European economies - France, Italy, and Spain - will hold elections next year, with France attracting the most attention. As these elections approach, we anticipate significant fiscal easing across the region; after all, this is what most governments tend to do during election periods," explains David Zahn, Head of European Fixed Income at Franklin Templeton.

"In France, campaign momentum is expected to intensify from September-October of this year, leading to increased focus on candidates and their policies. We believe this should weigh on bond markets. French spreads have tightened to around 65 to 70 basis points relative to Germany, a level we consider too low given the deterioration of the country's fiscal path and the high level of political risk. We believe their fair value is closer to 100 basis points."

Traders are also continuing to monitor developments in the Middle East war, where a protracted conflict, or worse, a new outbreak of violence, could further weigh on the Euro. The renewed tensions in Iran are dampening the general appetite for risk. The United States has conducted strikes against Iranian sites along the Strait of Hormuz in response to the loss of an Apache helicopter, attributed to an offensive by Tehran. Iran has denied shooting down the aircraft and announced that it targeted US bases.

Right now, the EUR/USD is trading at $1.1557.

KEY TECHNICAL ELEMENTS
The intermediate support level at $1.160, which acted as a safeguard, was broken on Friday amid significant volatility, lending credence to our bearish scenario towards $1.1202.

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

Our entry point is $1.1559. The price target for our bearish scenario is $1.1203. To protect your capital, we advise placing a stop-loss order at $1.1651.

The expected profit for this Forex strategy is 356 pips, and the potential loss is 92 pips.