The euro-dollar pair froze around the middle of the 17th figure. Buyers overcame the intermediate resistance level of 1.1740 (Tenkan-sen line on the daily chart), but then the upward momentum began to gradually fade. The pair is forced to trade within a narrow price range, reflecting the indecision of both bulls and bears of EUR/USD.
The market froze in anticipation of the key event of the current week and month. The economic symposium in Jackson Hole, which starts the day after tomorrow, will determine the future fate of the greenback. Dollar bulls will either strengthen their positions or weaken significantly. By and large, there is no third option - Jerome Powell, with all his desire, will not be able to find an alternative option, satisfying the requests of both buyers and sellers of EUR/USD. The dumb question of traders sounds quite simple: does the Federal Reserve intend to start curtailing QE this year? And the answer to this question should also sound quite succinctly - "yes/no". The chairman of the Fed may stretch his speech for several hours, but the essence of his speech will be reduced to one of the above-mentioned answers to the key question of investors.
As a rule, on the eve of such significant and defining events, anxiety and concern reign in the market. Fed representative Robert Kaplan also added fuel to the fire, who allowed the option of a wait-and-see position "if the virus continues to advance".
COVID is really coming – both in the US and in Europe. Therefore, traders were quite justifiably concerned that Jerome Powell, during his speech on Friday, would focus his attention on the risks of an increase in the coronavirus crisis and, accordingly, a slowdown in the recovery process. A kind of alarm bell has already sounded: American inflation has shown the first signs of slowing down. In July, the overall consumer price index was at 5.4% (as in June), exceeding the forecasts of most experts, who predicted a slight decline to 5.3%. On a monthly basis, the overall CPI slowed its growth, reaching the level of 0.5% (in June, this indicator was at the level of 0.9%). The core consumer price index, excluding food and energy prices, in annual terms came out per forecasts – at the level of 4.3%. But in monthly terms, the indicator was in the "red zone", falling short of the forecast values. Instead of a modest growth to the level of 0.4% (after the June growth to 0.9%), the indicator rose to only 0.3%.
The Federal Reserve focuses mainly on core inflation and the PCE Price Core indicator. Therefore, after the above-mentioned inflation release, experts suggested on the market that a slowdown in the growth rate of core inflation would allow the US regulator not to rush to start curtailing monetary incentives. And it is this message that Jerome Powell can voice during his Friday speech.
However, not all analysts agree with this forecast. Many currency strategists point to the enormous scale of excess liquidity in the US financial system. According to "hawkish-minded" experts, the regulator is gradually preparing the markets for the curtailment of QE since the middle of summer. So, following the results of the July meeting, the US Central Bank surprised with the phrase that it is observing "some progress" in moving towards the targets of maximum employment and price stability, the achievement of which will allow us to start "tapering" (reducing the workload). The previous version of this phrase was as follows: "the sectors of the economy remain weak, but show improvement." It should be noted that after the July meeting of the Fed, July nonfarm payrolls were published, which exceeded all expectations. All components came out in the "green zone", reflecting the recovery of the American labor market.
In addition, many representatives of the Fed also speak in favor of implementing the "hawkish" scenario. Mary Daly, Esther George, Raphael Bostic, Eric Rosengren, James Bullard, Richard Clarida – all these representatives of the Fed have supported the idea of early curtailment of QE in one form or another for several weeks. The most prominent representatives of the "hawk wing" of the Federal Reserve also called for raising the interest rate in the second half of next year.
If we talk about the coronavirus factor, then the current situation cannot be completely identified with last year's. The US authorities, neither at the level of Washington nor at the level of state governors, are not talking about the introduction of lockdowns – calls for vaccination are much louder. The surge in the incidence has already been dubbed the "pandemic of the unvaccinated," since most Americans who were hospitalized or died from Covid were not vaccinated. Of course, Americans are afraid of the spread of the delta strain, and this fright was reflected in the consumer sentiment index from the University of Michigan and in July retail sales. But due to the low probability of re-introduction of quarantine restrictions, it can be assumed that the American economy will maintain the pace of its recovery in the second half of the year.
Thus, according to some experts, the US Federal Reserve System may postpone the reduction of asset purchases until 2022, while Jerome Powell will voice pessimistic rhetoric on Thursday, linking the prospects for monetary policy with the epidemiological situation in the United States. According to other analysts, the Fed chair will still hint at a possible curtailment of QE this year.
Judging by the dynamics of EUR/USD, the market is dominated by cautious sentiment (primarily due to the unexpectedly "dovish" speech of Robert Kaplan on Friday). This fact allowed the buyers of the pair to seize the initiative and go for a correction. But the corrective growth is also limited - after all, the second scenario ("hawkish") can also be realized, contrary to the reputation of Jerome Powell.
In my opinion, the "ceiling " of the corrective growth is the mark of 1.1790 (average line of the Bollinger Bands, which coincides with the Kijun-sen line on the daily chart). Traders are unlikely to decide to storm the 18th figure in the current conditions, while the euro is not capable of "independent play" - only due to the weakness of the greenback. Therefore, when approaching the boundaries of the 18th price level, it is best to close the longs and take a wait–and–see position until Jerome Powell's speech on Friday.
