The downtrend prevails for the EUR/USD pair, falling for the fifth consecutive week. In mid-July, the pair reached a multi-month high at 1.1276, but then sellers took over, as the dollar strengthened and the euro weakened. Last week, bears managed to settle around the 1.08 figure, but they couldn't stay below the support level of 1.0850 (the lower line of the Bollinger Bands indicator on the daily chart), even though they tested this target. The driver of the bearish movement was the USD, which strengthened amid mixed inflation data, hawkish Federal Reserve minutes, decent economic reports, and growing risk-off sentiment. The euro obediently followed the greenback, seemingly content with its role as a "follower" rather than a "leader."
This week, the focus will be on the dollar, which, in turn, is anticipating the key event of the month. The event in question is the annual economic symposium held in Jackson Hole, Wyoming.
The significance of this event cannot be overstated. The Jackson Hole symposium is often referred to as a "barometer" for the sentiment of central banks in leading countries. As is known, the forum is attended by central bank leaders from major countries (usually at the level of chairmen or their deputies), finance ministers, leading economists and analysts, and heads of the world's largest conglomerates and banking giants. For three days, they discuss pressing issues, crystallize certain signals, and define the main points of further steps. Typically, the financial elite discusses the most urgent issues at the time. For example, in 2015, the main topic was the crash on the Shanghai Stock Exchange, in 2016 the discussions focused on the consequences of Brexit, and in 2017 the expansion of bond spreads and the next steps of the Fed and European Central Bank were discussed. In 2018, the central topic of the meeting was the trade war between the US and China (or rather its consequences), in 2019, the global trade conflict was discussed again, as well as the impending Brexit. In 2020, the sole topic was the coronavirus crisis, in 2021, the aftermath of the crisis. The key issue discussed at Jackson Hole last year was inflation. It is evident that participants at this week's meeting will also focus on this issue, given the grim macroeconomic news from China.
During the three-day symposium, which starts on August 24th, many central bank heads and representatives will speak and may outline their future course of actions in the context of monetary policy prospects. In particular, Fed Chair Jerome Powell is expected to speak on Friday – if he adopts a hawkish stance, the US dollar will get another boost across the market, including against the euro. The latest US data maintains the intrigue on the Fed chair's stance, so we can guarantee the volatility for the EUR/USD pair (as well as other dollar pairs).
In short, the recent inflation reports have been somewhat contradictory. The Consumer Price Index in July showed an uptrend – for the first time in the last 12 months. The indicator rose to 3.2% year-on-year after June's result of 3.0%. However, the core CPI decreased to 4.7% (the lowest level since July 2021).
The Producer Price Index was in the "green" – both in annual and monthly terms. The PPI rose by 0.8%, compared to a forecast of 0.3%. The indicator had been steadily declining for 12 months, but it accelerated last month (for comparison, in June 2022 the PPI was at 11.3%, in June 2023, it was already at 0.1%). The core PPI also consistently declined over several months but remained at June's level in July, i.e., at 2.4%.
The report on the Import Price Index similarly favored the greenback. According to data published last week, the index in monthly terms was above zero for the first time since April 2023.
It is also necessary to recall the latest Non-farm Payrolls, specifically the "green hue" of the pro-inflationary indicator. The level of average hourly wage increased by 4.4% YoY in July, while experts expected a decrease to 4.1% (the indicator has been at 4.4% for four consecutive months).
The question emerges - will Powell focus on the acceleration of the CPI and the dynamics of the PPI? Or will the core CPI and the basic PCE index, which showed a slowdown in inflationary processes, be the focus of his speech?
According to data from the CME FedWatch Tool, the chances of a quarter point rate hike at the September meeting is currently only 11%. The likelihood of a rate hike at the November meeting is 33%. Powell may reinforce hawkish expectations regarding the Fed's future course of actions if he is concerned about the growth of the aforementioned inflation indicators. In this case, the Fed Chair will trigger a dollar rally, as a result of which the EUR/USD pair may not only fall to the base of the 8th figure but also test the support level of 1.0750 (Kijun-sen line on the daily chart). However, if Powell focuses on the side effects of aggressive monetary policy (especially in light of recent decisions by rating agencies Moody's and Fitch), the dollar will be under pressure: in this case, EUR/USD buyers may be able to return the pair to the range of 1.0950-1.1030.
Of course, apart from the economic symposium, EUR/USD traders will react to other fundamental factors in the background during the upcoming week (PMI indices, IFO, orders for durable goods, secondary housing sales in the US). However, Powell's speech is the main event not only of the upcoming week but probably of the whole of August in general.