EUR/USD: the probability of a Fed Funds rate hike is soaring

Despite the continued drop in crude oil prices following the gradual reopening of the Strait of Hormuz, the dollar continued to pressure the euro. The stakes are particularly high given that the Federal Reserve adopted a much more hawkish tone than expected at the conclusion of its latest monetary policy meeting - the first led by K. Warsh.

Traders are clearly betting on a more restrictive US monetary policy stance in the coming months, and thus do not rule out a 25-basis-point hike in dollar interest rates before the end of the year. According to CME Group's FedWatch tool, the probability of such a hike now exceeds 35% for the FOMC meeting concluding late in July.

The euro is also suffering from critical comments by the Court of Auditors regarding French debt - the only debt within the Eurozone that has not returned to pre-Covid levels. Ten months ahead of the 2027 elections, the Court of Auditors has reiterated its warning: "France's public finance situation is alarming and calls for strong, credible, and rapid measures" to avoid being "at the mercy of the markets," according to the body presided over by Amelie de Montchalin. Public debt in the monetary union's second-largest economy is soaring past the 3.5 trillion euro mark.

On the statistics front, currency traders received data on Wednesday regarding the IFO Business Climate Index for Germany, the Eurozone's largest economy. The barometer showed a very slight rise to 85.7, exactly in line with the market consensus.

"Business sentiment in Germany has improved. The IFO Business Climate Index rose to 85.6 points in June, up from 85 points in May," notes Clemens 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 are hoping for an easing of geopolitical tensions."

Right now, the EUR/USD is trading at $1.1380.

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

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

Our entry point is $1.1347. The price target for our bearish scenario is $1.1203. To protect the invested capital, we recommend placing a protective stop at $1.1411.

The expected return for this Forex strategy is 144 pips, and the risk of loss is 64 pips.