FX.co ★ Euro breaks downtrend

Judging by market expectations, the Fed's decision on tapering the quantitative easing program soon will consider the coronavirus threat. Markets have shifted their ground. Now they are waiting for the Fed to postpone the tapering until further notice. It resulted in a severe decline of the dollar index before the Jackson Hole symposium, which the USD counterparts used.

The euro bounced off its lows, and traders are trying to guess the next move. What is the present trend of the euro: a dead cat bounce, or the EUR/USD pair is on the verge of the uptrend?

One may consider both scenarios as possible. The temporary correction, followed by a deeper Euro pullback, is unlikely to happen. Instead, the markets are more likely to deal with a change in trend.

The euro is gaining not only because of the falling dollar but also because of the improving economic growth in Germany. The largest EU economy climbed 1.6% in the second quarter, according to updated statistics, whereas previously it was up 1.5%. If the European economy suddenly starts to outperform the US economy, the EUR/USD buyers will have an indisputable explanation of their bullish choice.

Europe is better prepared than America to deal with the new wave of the pandemic. Firstly, vaccination rates are higher, secondly, the number of cases is lower than in the US, and thirdly, the number of infected people in Europe is decreasing, while in the US it is increasing. The comparison, as we can see, is in favor of the euro.

There is reason to believe that the EUR/USD pair follows the same way, as it was in the market from April to December 2020. There is no hundred percent certainty as everything is in the Fed's hands. We can observe how the markets respond to the comments by the Fed's officials on the monetary policy. The outlook is changeable and feels like the weather: sunny today and rainy tomorrow; last week they were preparing to cut the QE program, and this week they changed their minds, at least at the beginning of this week.

It remains to hear what Jerome Powell will say at the Jackson Hole symposium. Whether he will be worried about the delta variant or support the sentiment of previous weeks when the markets were actively betting on tapering.

The slightest hint from Powell could once again force the markets to re-shape. Then last year's trend of the euro, when it jumped to the highs around 1.2200, will be blocked once again.

In general, the outlook is not uncertain as there are only two ways – up or back down. However, it is always the case in the markets. The only thing is to figure out which way is the right one!

Even though the euro has internal reasons for a good disposition, the growth of the EUR/USD quote is now exclusively based on the sale of the dollar. If Powell does not make a mixed bag of the monetary policy and pandemic, the dollar is likely to be bought off again and the euro will be in trouble. In this case, we should already be looking for attractive levels to sell the euro after the symposium.

At the moment, the growth of the euro should be treated only as a corrective one. Levels above 1.1800 and, if we are lucky, 1.1900 look attractive to open a medium-term sell on the euro. A September Fed meeting, from which markets hope to get more specifics about the QE tapering, could be the reason for the resumption of the decline.

Resistance is at 1.1748, 1.1780 and 1.1805 and 1.1825. Support is at 1.1720, 1.1705, 1.1690 and 1.1660.