EUR/USD: Germany's DEW index soars

Is the German economy - the Eurozone's largest - poised to emerge from the crisis? That is certainly the signal sent by the ZEW index, which smashed expectations this month. However, this figure must be viewed with caution, given that energy prices are surging again amidst an extremely tense geopolitical climate in the Middle East.

Specifically, the ZEW index - produced by the *Zentrum fur Europaische Wirtschaftsforschung* (Centre for European Economic Research) to measure trader sentiment regarding Germany's economic outlook - jumped to 23.4, up from 10.4 last month. This far exceeded even optimistic forecasts of 15.

"The economic outlook continues to improve in July; it appears that reforms are bearing fruit. Export-oriented sectors and domestic demand, in particular, are experiencing sustained growth. Nevertheless, uncertainty surrounding the evolution of the conflict involving Iran and oil prices remains a decisive factor for the German economy's recovery prospects," comments Professor Wambach, President of the ZEW, regarding the survey results.

Indeed, the geopolitical situation in the Middle East remains tense and highly unpredictable, while a new bottleneck for crude oil transit in the Red Sea is becoming problematic.

On Monday, Yemen's Iran-backed Houthi rebels announced a maritime blockade of Saudi Arabia following an exchange of fire between the two sides last week, AFP reports.

The rebels "announce a maritime blockade against the criminal Saudi enemy, based on the 'eye for an eye' principle, effective immediately upon the release of this statement," said their military spokesman, Yahya Saree, as quoted by the agency. The rebels say they are responding to the blockade imposed by Saudi Arabia on Houthi-controlled "ports and airports," as well as to last week's attack on Sanaa airport, asserting that the Houthis would retaliate "with a blockade against a blockade, and with escalation against escalation." However, the Saudi port of Yanbu on the Red Sea allows the Kingdom to export its oil while bypassing the Strait of Hormuz - a waterway disrupted since the conflict between the US and Iran, which saw a fresh flare-up of tensions this weekend.

Thomas Giudici, Head of Fixed Income at Auris Gestion, puts the situation in perspective: "While geopolitics may seem to have returned to square one, the markets are not succumbing to panic. Oil prices - which initially held up relatively well when hostilities resumed - did indeed rise by around ten dollars over the course of the week. Nevertheless, the scenarios that dominated the spring - based on a prolonged closure of the Strait of Hormuz and its impact on global supplies - have not resurfaced. Investors now appear to believe that the workarounds developed by Gulf nations, available production capacity, and relatively abundant global supply significantly reduce the risk of a genuine oil shock."

It is against this backdrop that the ECB Governing Council meeting will conclude on Thursday. A monetary policy status quo is widely expected. Konstantin Veit, a portfolio manager at PIMCO, anticipates "a unanimous decision to keep rates unchanged, accompanied by a message emphasizing data dependency and avoiding any prior commitment to a specific rate path, while reaffirming the ECB's capacity to act if necessary. [His] base-case scenario remains another rate hike in September."

Next week, on 28 July, it will be the Fed's turn to conclude its Federal Open Market Committee (FOMC) meeting.

Right now, the EUR/USD is trading at $1.1407.

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 surge of intense selling pressure. The target of $1.1203 remains in place. The spot price is currently breaking below annual lows ($1.1408).

A break below $1.1202, accompanied by significant volatility, would lock in a lower bearish target of $1.1012, prior to a sharp, swing-style bullish rebound.

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

Our entry point is $1.1427. The price target for our bearish scenario is $1.1013. To protect invested capital, we recommend placing a stop-loss order at $1.1531.

The expected return for this forex strategy is 414 pips, with a risk of loss of 104 pips.