FX markets focus on the ‘un-said’ at Jackson hole as EUR spirals higher
US Federal Reserve's chairwoman Janet Yellen did not talk about US interest rates and European Central Bank chief Mario Draghi said nothing about tapering quantitative easing leaving traders to draw their own conclusions and so bought EURs.
As policy makers stayed silent on monetary policy at their Jackson Hole symposium, the EUR edged closer to critical resistance around EUR/USD 1.2000 with the single currency having decisively broken out of a nearly two-year consolidation pattern back in early July.
Yellen focused on the benefits of financial reforms making the financial system safer whilst Draghi voiced optimism over Eurozone growth even if inflation remained low (whilst not talking down the EUR). The FX markets read that as the Fed won’t raise rates that fast whilst the ECB will start talking about tapering possibly as early as next month - so buy EUR and sell USD.
Conditions should be ripe for central bankers to start normalising monetary policy with global economic growth being more broadly based. However, it is relatively fragile, is happening on the back of record amounts of debt and not enough of the extra wealth is trickling down to the poorer stratas of society, which is fuelling populism and protectionist sentiment.
Indeed, Draghi and his colleagues are in something of a dilemma because they’d like to taper the ECB’s QE, but don’t want the EUR to soar. Benign inflation pressures, and for as long as they stay that way, will give the ECB some scope to delay the beginning of normalising monetary policy and can more easily talk the EUR down – so EUR bulls should be on alert for that very likely eventuality. Indeed, the ECB may repeat that a stronger EUR will mute inflation pressures implying less urgency to taper.
Meanwhile over in the US, H2 economic growth is expected to improve, but the country remains stuck in a political deadlock meaning that the administration’s growth plans may not come to fruition. And this plays into negotiations over the US debt ceiling – any sign that it won’t be raised by October could put USD under further pressures, compounding difficulties for the ECB in its bid to announce the start of tapering.
The EUR could well cruise into EURUSD 1.2000+ territory in the coming weeks, but the path above that will likely become a lot rockier as the ECB has already indicated once that it is concerned about EUR strength and central bankers tend not to like fast currency moves.
Two key events this week that could blunt or reinforce the trend are preliminary or flash Eurozone CPI estimate – expected at ~1.4% (well below the ECB’s 2.0% target) and on Friday it is US Non-Farm Payrolls anticipated around 180,000 with hourly earnings seen rising at around 0.2%.
TECHNICAL ANALYSIS - EUR/USD: looking set to challenge 1.2000
Following a relatively short consolidation pattern, EURUSD once again looks set to have another stab at 1.2000. With the pair having hit their highest levels since January 2015, there could be a real battle around the psychologically important 1.2000 level with short sellers likely to give the bulls a run for their money.
A clean breakthrough would probably require a strong news catalyst, otherwise there could be a lot of volatility around that level with the chances of a break-out looking relatively good, especially as the pair took a breather around the 1.1600-1.1700 level.
However, the pair are outside the upper Bollinger band – a situation that tends to be relatively short lived either because the rally doesn’t go much further or there’s a pull back. At 66, the RSI is still in neutral, but nearing over-bought and combined with the situation with the Bollinger bands, suggests a pause is in order shortly.
Resistance can be seen around 1.1952, 1.1960, 1.2000, 1.2040, 1.2050 and 1.2057 with support implied around 1.1880, 1.1871 1.1825 and 1.1780.
By Justin Pugsley, Markets Analyst, MahiFX