EUR/USD: Waiting for Powell to pierce potent price cap, volatility set to explode
A joyful day for the bulls? Jerome Powell, Chairman of the Federal Reserve, will address the virtual Jackson Hole Symposium and may down the dollar. Tension has been mounting all week and limiting , which may now explode.
Investors expect Powell to introduce a new monetary policy framework which includes Average Inflation Targeting (AIT). That means allowing consumer prices to run hot – compensating for previous shortfalls. As the Fed mostly failed in achieving its 2% inflation target, adopting that new framework would keep interest rates lower for longer, weakening the dollar.
How much of that is already priced in? The dollar’s recent stability indicates that markets are uncertain that Powell will take that path. The response depends on the speech and the details the world’s most powerful central banker provides.
Ahead of the speech, the US releases initial jobless claims, which carry expectations of improving after a disappointing increase over one million last week. The lapse of federal unemployment benefits worth $600/week is weighing on the economy that continues its gradual recovery.
Investors will also eye the second release of figures for the second quarter. A minor upgrade is on the cards following the initial report reading a record drop of 32.9% annualized.
The state of the economy and the stock market also play a role in politics. President Donald Trump is set to deliver his acceptance speech at the Republican National Convention. Protests against social injustice in Wisconsin are competing with the news from the GOP event, but their impact is unclear. Trump has somewhat narrowed the gap with rival Biden.
Coronavirus headlines have been mostly positive. Markets are shrugging off the increase in European cases and encouraged by the drop in American figures. More importantly, hopes for a vaccine are keeping stocks bid and somewhat weighing on the dollar.
Moderna, a firm based in Massachusets, said its vaccine candidate triggers a positive response also with the elderly. Further developments may move markets.
Overall, the focus is on the Fed, with some room for other events to impact markets.
EUR/USD Technical Analysis
Euro/dollar is capped under the crucial resistance line of 1.1850, which held it down in recent days and also converges with the 50 Simple Moving Average on the four-hour chart. On the other hand, momentum has turned positive and EUR/USD trades above the 100 and 200 SMAs.
Beyond 1.1850, the next target is 1.1875, a swing high on the way down, followed by the early August peak of 1.1915 and the two-year high of 1.1965.
Support awaits at 1.18, a round level that provided support last week. It is followed by 1.1750, the previous week’s trough, followed by 1.17, a double-bottom.