On Friday, the EUR/USD pair refreshed its two-month price low, marking the 1.0765 level. For the first time since June, the price ended the trading week within the 7th figure. Even though buyers managed to regain losses by the end of Friday's trades, the bears were still in control of the market – the pair has been consistently declining for the sixth consecutive week. Judging by everything, the downtrend will continue, especially considering the latest statements from Federal Reserve officials, primarily Fed Chair Jerome Powell.
Powell spoke at an economic symposium in Jackson Hole, where he commented on the current situation and cautiously hinted at the central bank's possible actions in upcoming meetings. Prior to his speech, the dollar began to rapidly gain momentum, as if reacting to an insider about Powell's hawkish attitude. Powell did not disappoint dollar bulls. Although his statements were somewhat vague, overall the tone of his stance supported the USD. Looking ahead, it's worth noting that according to the CME FedWatch Tool, Powell did not reinforce the hawkish sentiment regarding the potential outcomes of the September meeting. Following his speech, the likelihood of a 25-point rate hike in September remained at 20%. However, predictions regarding the Fed's November meeting were revised – currently, the chances of a 25-point rate hike jumped to almost 50%.
This indicates that the majority of market participants are making a sensible assessment of September's prospects but still harbor certain hopes regarding the results of the November FOMC (Federal Open Market Committee) meeting. And for this reason, the dollar strengthened following Friday's events, but as they say, "without fanaticism." The Dollar Index jumped to 104.38 (the highest since early June), afterwards it retreated to the base of the 104 mark. In turn, sellers descended to the middle of the 7th figure, but by the end of Friday's trades, they took profits and ended the week at the border of the 8th price level.
Nevertheless, despite the relatively restrained reaction of the greenback, the significance of Powell's speech should not be underestimated. He made it clear that the Fed is ready to continue raising interest rates, contrary to rumors that it has already reached its peak.
Notably, speaking at the economic symposium on Friday, Powell referred to his speech from the previous year in Jackson Hole, stating that the FOMC intends to continue to combat inflation. This is quite an important remark if you recall what he specifically said at that time. To briefly remind you: at last year's symposium, the Fed chair unequivocally indicated that the central bank would not consider potential "side effects" and would raise the interest rate, acknowledging that this might harm households and businesses.
Projecting this position onto today's realities, one can conclude that the Fed is prepared to further raise the interest rate by the end of this year if inflation stops falling. Meanwhile, recent inflation reports have already started signaling such prospects (the rise in the Consumer Price Index in July, the increase in the Producer Price Index, the growth in wage indicators).
Moreover, during his recent speech, Powell forecasted an increase in the core Personal Consumption Expenditures Index, which, to remind you, fell to 4.1% in June. According to Powell, this indicator will show an uptrend in July, rising to 4.3%, after two consecutive months of decline. He also pointed to the dynamics of the aforementioned indexes – Producer Price Index and the general CPI. The core PCE index will be published on August 31. Even if this indicator is at the level that Powell "announced" (let alone in the "green zone"), the chances of a rate hike in the September or (especially) November meeting will significantly increase. This factor will provide significant support to the US currency.
In regards to the inflation reports, Powell acknowledged that inflation has decreased from its peak. However, he also expressed concern that inflation remains too high. He said that the Fed is prepared, firstly, to continue raising rates "if appropriate," and secondly, to keep them at a restrictive level "until we are confident that inflation is moving sustainably down toward our objective."
In other words, Powell reiterated that it was important to combat inflation, presenting two possible scenarios – either maintaining the rate or increasing it. Given the alarming signals from the recent inflation reports and the latest data on US economic growth (the US GDP, as a reminder, increased by 2.4% in the second quarter against a forecast of 1.8%), one can assume that the Fed will likely use the available "option" to increase the rate by 25 bps in one of the upcoming meetings.
So, what's the bottom line? Powell's cautious but decidedly hawkish stance and rising rate hike chances. This is quite sufficient for the dollar to feel confident and comfortable against the major currency pairs, including against the euro, which is under pressure from the recent disappointing data on the growth of PMIs (Purchasing Managers' Index) and IFO (Information and Forschung) indices.
This fundamental backdrop favors a downtrend in the medium term. The nearest target for the bearish movement is at the 1.0750 mark (the lower Bollinger Bands line on the four-hour chart). The main goal is the 1.0670 mark (the lower Bollinger Bands line on the weekly chart).