EUR/USD: What's new with the pair?

The EUR/USD continued its slide, failing to benefit at all from the respite seen late last week in bond and oil markets. The overarching backdrop remains unchanged, with the single currency weighed down by waning risk appetite and chronic wariness regarding France's fiscal situation.

"The widely discussed recent surge in the yield gap (or spread) between France and Germany has been accompanied by a new phenomenon: the contagion of tensions to the rest of the eurozone," notes Enguerrand Artaz, Strategist at La Financiere de l'Echiquier (LFDE).

"Until now, other European assets had remained largely immune to the stress surrounding France's fiscal situation. However, in recent days - while equity markets were under pressure - spreads for many countries have widened. The 10-year yield spreads against Germany for Italy and Greece widened by nearly 30 basis points (0.3%), while the Spanish spread widened by 14 basis points. Even the Portuguese spread increased, despite the country boasting one of the strongest debt and deficit trajectories in the eurozone."

As of Tuesday morning, the yield on the French 10-year bond stood at 4.83%, with a spread of 140 basis points - or 1.4 percentage points. This means that even when the 10-year OAT yield eases slightly, the German Bund yield eases even more...

This easing can be attributed to the trajectory of crude oil prices, which have now plateaued - avoiding any further surge - after Donald Trump ruled out new US strikes against Iran prior to the midterm elections.

"Recent polls indeed show the Democrats' lead widening steadily, even in states historically considered Republican strongholds. American discontent is being fueled by rising gasoline and diesel prices; these are expected to remain high - despite tax cuts announced this week - due to the loss of refining capacity and, above all, the rise in the price of physical oil ($135)," explain ING economists.

On the macroeconomic front, the week is off to a quiet start, but the agenda will pick up today with inflation data - specifically consumer price dynamics, or the CPI. Excluding food and energy (volatile components), prices are expected to rise at an annualised rate of 2.4%, up from +2.3% the previous month. This figure is a key reference point for the Federal Reserve when formulating its monetary policy strategy.

Right now, the EUR/USD is trading at $1.1205.

KEY TECHNICAL FACTORS
Following a period of sideways movement, the downward volatility observed and measured on Monday, September 14, indicates a breakout direction that allows us to resume short positions on this major currency pair. The increase in volatility on 15 September - following the break below the 50-day moving average (shown in orange) - supports this scenario, as do 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 FORECAST
Based on the key chart factors mentioned, our medium-term outlook for the EUR/USD is bearish.

Our entry point is $1.1183. The price target for our bearish scenario is $1.0609. To protect invested capital, we recommend placing a stop-loss order at $1.1341.

The expected return for this strategy is 574 pips, with a risk of 158 pips.