Will Jerome Powell discourage investors or meet the market’s expectations in Jackson Hole? The Fed Chair’s speech will determine the EURUSD trend. Let us discuss the Forex outlook and make up a trading plan.
Fundamental euro forecast today
Investors have ignored Fed members’ hawkish comments, expecting the regulator to slow monetary tightening and save the US economy from a recession. It is high time they admitted their mistakes. The S&P 500 has been 4% down from its August highs, suggesting some bulls have exited longs. However, some investors still expect the uptrend to continue and buy stocks, hoping the expected scenario will realize.
Investors continue believing in the old scheme when at the slightest sign of a slowdown in the US economy, the Fed slows down or stops the process of raising rates and begins to hint at monetary easing. This was the case with low inflation, but now it is the highest in 40 years, and the central bank has no choice but to continue monetary tightening.
The Fed has little choice. It should either break down the labour market, making unemployment rise, or violate financial conditions, which have significantly loosened recently despite the Fed’s hawkish stance.
Dynamics of financial conditions and S&P 500
Investors have focused on whether the Fed will raise rates in September by 50 or 75 basis points. According to Atlanta Fed President Raphael Bostic, answering this question is like a coin toss. If the upcoming data shows the strength of the labour market and that inflation has not peaked, a more aggressive move would be necessary. The President of the Kansas City Fed, Esther George, and the Philadelphia Fed President, Patrick Harker, have the same opinion, making reference to data that will soon appear.
One needs to correctly place the accents. How much the federal funds rate will be raised at the next FOMC meeting is not as important as its ceiling and the duration of holding it at a high level. Furthermore, the Fed aims at tighter financial conditions and a strong US dollar, which will make it easier to bring inflation back to the 2% target.
The ECB is lagging far behind the Fed. The minutes of the July meeting of the Governing Council showed that officials are seriously concerned about the weakening of the euro, which is an important change in the foreign environment and implies increased inflationary pressures. In particular, this is due to the higher cost of energy imports, which are denominated in US dollars.
EURUSD trading plan today
In my opinion, no matter what Jerome Powell says at Jackson Hole, the EURUSD medium-term trend will remain down. It is relevant to add up to the shorts entered at 1.002 if the price breaks out the supports at 0.995 and 0.991. Otherwise, if the price breaks out the resistance at 1.003, it could be corrected up in the short term.
Price chart of EURUSD in real time mode
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