EUR/USD: 1.12$ target is maintained, at the end of a volatile week

The balance of power between the two benchmark spot currencies, EUR + USD, remained clearly in the dollar's favour in the short term, due to the Fed's much firmer tone than anticipated. The first Monetary Policy Committee meeting chaired by Karl Warsaw did indeed end, as widely expected, with the dollar's interest rate remaining unchanged. However, the prospect of a pivot is receding, leaving open the possibility, should tensions in the Middle East persist, of a (single?) increase in federal interest rates. This was the monetary event of the week, along with its corollary: the flattening of the yield curve, namely the narrowing of the gap between the 2-year and 10-year Treasury yields.

"A flattening of the index often reflects ongoing or anticipated monetary tightening to combat inflation, without necessarily foreshadowing an immediate recession. It indicates that the Fed is acting or will potentially act. This flattening reflects a 'hawkish' revision of expectations regarding the Fed's response to inflation, with short-term rates reacting more sharply. This is consistent with an environment of resilient but inflationary growth," explains Alexandre Baradez (IG France).

And this is true even though geopolitical events have temporarily averted the risks of second-round hyperinflation, following the signing of a memorandum of understanding between Tehran and Washington. Negotiations aimed at reaching a formal peace agreement, scheduled to begin this Friday in Switzerland, have nevertheless been postponed indefinitely, causing a very slight rebound in the price of oil, near $77 for the West Texas Intermediate (WTI) benchmark.

"The situation remains fragile: many ships are still waiting for passage in the region, and any resurgence of tensions could quickly reignite upward pressure on oil and, consequently, on the dollar," according to Ugo Lancioni, Head of Global Currency Strategy at Neuberger. He summarized the latest Fed meeting, the first chaired by Kevin Warsh, as follows: it "was more restrictive than expected. While key interest rates were left unchanged, Federal Reserve members' expectations were revised upward more sharply than anticipated. A majority now believe that rates will need to remain high for longer, while half of the members expect at least one more hike by the end of the year. Inflation forecasts for 2026 were also significantly raised."

It should be noted that currency traders will be deprived of valuable guidance from Wall Street, which will remain closed for a public holiday (Juneteenth).

On the economic front yesterday, two key US figures stood out: weekly jobless claims, which remained low and close to the 226,000 mark, and the Philadelphia Fed's manufacturing index, which came in slightly above expectations at 10.4. "Indicators related to ongoing activity, new orders, and shipments improved and were all positive. Overall, businesses continued to post general price increases. The main indicators in the survey regarding future activity point to growth prospects for the next six months," reads the press release accompanying the Philly Fed survey.

Right now, the EUR/USD is trading at $1.1467.

KEY TECHNICAL ELEMENTS
The pullback (rejection) we identified in our previous analyses, at a confluence of resistance levels (horizontal line at $1.1610 and 20-day moving average), was followed by a surge of selling pressure. The target of $1.1203 remains unchanged.

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 $1.1457. The price target for our bearish scenario is $1.1203. To protect your capital, we recommend placing a stop-loss order at $1.1541.

The expected profit for this strategy is 254 pips, and the potential loss is 84 pips.