EUR/USD: the euro is in a fragile state of equilibrium

The euro regained a form of precarious short-term balance against the dollar, after the latter had been bolstered last week by the Fed's FOMC meeting.

The tougher stance taken by Fed official K. Warsh at the committee's first meeting back from the summer break had a significant impact on the euro/dollar currency pair, confirming a decisive break below the $1.1566 level - a threshold that can now be characterized as solid resistance.

As the market had gradually priced in, the Fed raised its key policy rate - the cost of borrowing dollars - by 25 basis points. However, what came as a surprise was the "hawkish" tone adopted by an official otherwise known for favoring loose monetary policy.

"The Fed raised rates by 25 basis points, as expected. Nevertheless, it was a rather hawkish hike: Warsh emphasized the strength of the US economy and the need to combat persistent inflation, which has remained above the 2% target for five years. While he offered no personal guidance on future decisions, the Committee anticipates another rate hike this year. In his view, monetary policy is not yet sufficiently restrictive; despite bond yields sitting at multi-year highs, financial conditions have not tightened significantly," comments Andrew Lake, CIO and Head of Fixed Income at Mirabaud Asset Management.

"However, rate hikes will not resolve the ongoing energy supply shock, which is beginning to spill over into a wider range of prices. Food prices are rising alongside agricultural costs, while in Europe, energy and gas prices are particularly sensitive to the consequences of the war. Interest rates are a rather blunt instrument: they aim to slow down the rest of the economy in an attempt to contain the conflict's inflationary effects." Current budgetary developments call for particular caution regarding the euro. The yield on the 10-year German bond is rising by two basis points, while the yield on the French equivalent is widening much more sharply - by six basis points. The gap between the two bonds - the "spread," which serves as a barometer for market stress - now stands at one percentage point, its highest level since the Eurozone sovereign debt crisis of 2012.

Last week, strategists at UBS warned that this spread risked widening further beyond 0.9 percentage points "as we approach the budget debates ahead of next year's presidential election."

On Thursday evening, Prime Minister Sebastien Lecornu outlined - in an interview with *Le Figaro* - broad strategies to generate a total of 53 billion euros in savings, notably through freezing the civil service pay index and curbing certain pension expenditures.

The Finance Ministry subsequently clarified that the target deficit for this year would be exactly 5.3%. This is 0.4 percentage points higher than the initial target: 0.3 points are attributed to the impact of successive shocks that dampened growth (and thus public revenue), while 0.1 points stem from the resurgence of inflation and rising interest rates.

Also on the agenda for 17:00 (EU time) is a speech by ECB President Lagarde regarding digital euros for banks.

Right now, the EUR/USD is trading at $1.14887.

KEY TECHNICAL FACTORS
Following a period of sideways movement, the downward volatility observed on 14 September, indicates a breakout direction that allows us to resume short positions on this key currency pair. The increase in volatility on 16 September - following the break below the 50-day moving average (shown in orange) - supports this.

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

Our entry point is $1.1478. The target price for our bearish scenario is $1.1013. To protect invested capital, we recommend placing a stop-loss order at $1.1567.

The expected return for this forex strategy is 465 pips, with a risk of loss of 89 pips.