A new week has begun. Interestingly, investors are now glad about prospects that may have pushed markets down a week ago. For example, they are quite happy that the Fed may postpone the reduction of asset purchases. This means that the US dollar may lose its bullish momentum, looking for new drivers. Besides, the Jackson Hole Economic Symposium will take place this week. Jerome Powell's speech will be carefully analyzed by traders for further steps in monetary policy.
Market sentiment is quite optimistic now as traders are ignoring crucial details. For instance, the Fed may postpone the tapering of the bond-buying program due to a rapid spread of the Delta variant. The symposium will be held not in Wyoming but in the online format, which is also a kind of bell regarding the deterioration of the epidemic situation in the United States and the world. now, economists are extremely worried about the possibility of a slowdown in the economic recovery.
Uncertainty and risks of deterioration of the current epidemiological situation may lead to an increase in safe-haven assets. Now investors do not want to think about it. They consider the Delta strain as the main reason for the failure of the Fed's plans. The US dollar is under pressure. Analysts admit a change in the trend of the US currency against a basket of six major currencies. The US dollar may resume a downward movement if the Fed officially announces that it will not rush to reduce QE. At the same time, some experts are sure that the Delta variant is unlikely to undermine the economic recovery as this is be a completely different situation and everyone is now more prepared.
Currently, traders are waiting for the speech of Jerome Powell, studying the opinions of other high-ranking members of the Fed. Apparently, the hawkish mood is giving way to the dovish one. It is a reverse reaction. So, CEO of the Federal Reserve Bank of Dallas Robert Kaplan, who is also hawkish on monetary policy, is now rather silent and refrains from making comments about a change in monetary policy. He said that he may reconsider the need to start tapering QE earlier than planned due to the Delta strain.
In this statement, as well as other similar ones, market players may see a signal that the Fed will continue to inject liquidity into the economy for a longer period of time than expected.
The US dollar index is projected to decline deeper. It has already decreased below the high of 93.20. This means that it is likely to extend losses in the short term. The next important target is the level of 92.50.
In the meantime, the dollar US is trading above the 200-day SMA (91.30). The long-term outlook remains positive.
Investors have almost completely factored in the announcement of tapering into the US dollar index at the Jackson Hole Symposium or at the Fed's September meeting. Therefore, now there is a rollback. In fact, no one knows what Powell will say at the symposium about QE. He may also ignore this topic.
Commenting on monetary policy, Powell will certainly take into account a report on US GDP for the second quarter, negative retail sales data, as well as weak data on the Philadelphia Federal Reserve Manufacturing Index. Nevertheless, the Fed may also reduce asset purchases in a small volume, carefully watching the further reaction of markets and macroeconomic statistics. If so, then the principle of "buy on rumors, sell on facts" may work.
Hence, the current situation is quite bullish for the euro. It managed to rise above 1.1700. Now the question is whether the EUR/USD pair may break through the resistance level and return to the 1.1800 level.
It will be seen after the results of the Symposium and Powell's speech. However, the rally of the euro depends not only on the US dollar but also on internal factors. It is unlikely to grow if fundamental factors are negative, in particular, the deterioration of the epidemiological situation in the region.
The number of cases is decreasing in Spain and Italy, while in France and Germany there is an increase. The vaccination rate is high. Yet, the only news about a noticeable decline in coronavirus cases may support the euro.
The IHS Markit Eurozone PMI Index for August is also of interest. In case of any surprise, bulls may lose ground. Meanwhile, the Manufacturing and Services PMI Indexes fell to 59.5 from 60.2, undershooting the forecast.
According to technical analysis, the EUR/USD pair may retreat to the level of 1.1726 and further to 1.1766. If so, investors may open short positions with the possibility of a fall to 1.1630. If the price manages to consolidate above these levels, this scenario is unlikely to unfold.
Despite the recent growth, the bullish trend for the euro seems rather shaky. The quote is still trading below the resistance level of the downtrend since the beginning of August.
The resistance levels are located at 1.1722, 1.1740, 1.1785, and 1.1805. The support levels are located at 1.1700, 1.1690, and 1.1660.
