EUR/USD: the spread is widening

The widening of the France-Germany yield spread - set against a backdrop of diplomatic, geopolitical, and military deadlock between Washington and Tehran - is weighing on the single currency, creating an environment hardly conducive to risk-taking in financial markets. "With the OAT yield nearing 5% and the spread close to 130 basis points, a significant portion of the risk we foresaw just a few weeks ago is already materialising," notes Christopher Dembik, an investment strategy advisor at Pictet AM, in a sober assessment.

"A sustained breach of the 5% mark for the OAT, accompanied by a France-Germany spread heading toward 150 basis points, would mark a new stage in the deterioration of French financial conditions. In this environment, caution regarding French duration remains warranted until the fiscal and political trajectory offers greater visibility."

Today, the French 10-year bond yield hovered just below the 5% mark, while the spread - the gap relative to the German 10-year Bund - reached 142 basis points, driven by an acceleration of inflation in France.

In the US, it is worth noting that US prices rose by 2.3% in August - well below the 3.6% anticipated by the market - according to the PCE index, the Fed's preferred measure for assessing price dynamics. Yet, the probability of further hikes in the federal benchmark interest rate remains high. "The inflation report released [Wednesday], showing a smaller-than-expected rise in prices, should bring relief to Wall Street as investors hope to see the recent surge in US Treasury yields ease and expectations of a Fed rate hike next month fade. Both the headline and core PCE indices came in below forecasts, with their year-over-year growth falling to a six-month low," comments Bret Kenwell, US market analyst at eToro.

In the wake of the report, the probability of a 25-basis-point hike in the federal funds rate fell back below 40%.

"The fight against inflation is far from over, but [Wednesday's] figures are moving in the right direction. A sharp drop in oil prices would help alleviate inflationary pressures. For now, however, attention is focused on Treasury yields, which have risen sharply over the past month even as stocks have held up relatively well. This report could finally put the brakes on that rise," the specialist adds.

Right now, the EUR/USD is trading at $1.12582.

KEY TECHNICAL FACTORS
Following a period of sideways movement, the bearish volatility observed and measured on 14 September, indicated a breakout direction that allows us to re-enter short positions on this major currency pair. The increase in volatility on 15 September - coinciding with a break below the 50-day moving average (shown in orange) - supports this scenario, as does the sharp bearish acceleration on September 23 and the precise pullback on 24 September to the $1.1411 level, which has now shifted to major resistance.

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

Our entry point is $1.1248. The target price for our bearish scenario is $1.1013. To protect invested capital, we recommend placing a stop-loss order at $1.1328.

The expected return for this forex strategy is 235 pips, with a risk of loss of 80 pips.