EUR/USD: Selling forces have been liberated

The foreign exchange market continued to favour the dollar in the short term as losses on the EUR/USD accelerated following the first FOMC meeting led by Kevin Warsh. Without appearing overtly hawkish, the powerful central bank demonstrated last week its firm determination to combat any resurgence of inflation - even as tensions in the Middle East have significantly eased.

This has created an environment of persistently high interest rates, particularly following a speech by new Fed Chair Kevin Warsh that was more "hawkish" than anticipated, according to Alexandre Baradez (IG France).

The first monetary policy meeting under Warsh's leadership resulted - as widely expected - in no change to the cost of borrowing in dollars. However, the prospect of a policy pivot is receding, raising the possibility that - should Middle East tensions persist - there might be only a single federal rate hike before the end of the year. This was the key monetary event of the past week, accompanied by a corollary effect: the flattening of the yield curve, specifically a narrowing of the spread between 2-year and 10-year Treasury yields.

Against this backdrop, the Personal Consumption Expenditures (PCE) price data due tomorrow will be closely watched. It is worth noting that the Fed prefers this metric over the Consumer Price Index (CPI) when assessing inflation. The monthly figure for May is expected to rise by 0.3%, up from 0.2% in April.

In the immediate term, currency traders have digested the latest IFO Business Climate Index for Germany, the EU's largest economy. The barometer showed a slight rise to 85.5, landing in line with market consensus. "Business sentiment in Germany has improved. The ifo Business Climate Index rose to 85.7 points in June, up from 85 points in May," notes Clemen Fuest, President of the institute. "Companies assessed their current economic situation more optimistically. Expectations are also slightly less pessimistic. Businesses perceive the business environment as less uncertain and hope for an easing of geopolitical tensions."

As for the PMI activity barometers released on Tuesday for the Eurozone, the preliminary June figures show the manufacturing index above the 50-point mark at 51.1, while the services index remains below it at 49.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, commented on the latest Flash PMI figures: "The Eurozone economy is currently showing enough resilience to narrowly avoid slipping into recession. The June Flash PMI indicates only a slight decline in overall private sector activity compared to May - a trend suggesting that Eurozone GDP will remain stable in the second quarter relative to the first. The recent contraction in the services sector is showing encouraging signs of slowing down in June; notably, the tourism and leisure sector is reporting a rebound in demand following the initial disruptions caused by the war."

"On an encouraging note, falling energy prices are already filtering through to businesses: rates of cost and selling price inflation eased in June, suggesting that prices may now have peaked."

Right now, the EUR/USD is trading at $1.1353.

KEY TECHNICAL FACTORS
The pullback (technical rejection) we identified in previous analyses - occurring at a zone where resistance levels converged (the horizontal level at $1.1610 and the 20-day moving average) - was followed by a surge in selling pressure. The target of $1.1203 remains in place. The spot price is currently breaking below the annual lows ($1.1408).

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

Our entry point is $1.1342. The price target for our bearish scenario is $1.1203. To protect capital, we recommend placing a stop-loss order at $1.1381.

The expected return for this forex strategy is 139 pips, with a risk of 39 pips.