EUR/USD: The Jackson Hole Dollar Playbook

• 2-year Treasury yield rises 3.7bps to 4.979% (supports Fed’s higher for longer push)
• Dollar softens as risk appetite tentatively returns following last week’s stock market rout
• Fed Chair Powell to speak at Jackson Hole Symposium on Friday

The fate of the dollar will not solely depend on what Fed Chair Powell says at Jackson, but on several other factors. Will Nvidia’s earnings reignite the AI trade and provide much needed relief to tech stocks? How much additional support will we see from China? Is ECB President Lagarde ready to show which way she is leaning towards for the September meeting? Finally, will the global flash PMIs show that rate hiking cycles are starting to bring down the service sector?

Fed Chair Powell will be trying to avoid a policy mistake here. The annual Jackson Hole gathering will undoubtedly emphasize the need for policymakers to keep rates higher for longer.  Powell might stick to his hopes of a soft landing, while hinting that eventually rates will be able to come down.  It seems the majority of Wall Street is expecting Powell to deliver a hawkish hold, but any signs that the Fed is concerned about disorderly markets could end up supporting the case that the Fed will cut rates early next year.

EUR/USD Daily Chart

The EUR/USD (a daily chart of which is shown) as of Monday (8/21/2023) is seeing its bearish trend cool ahead of the Jackson Hole Symposium.  The euro’s slide had its eyes on the July low (1.0834), but that seems to be providing key support for now.  If the bond market selloff remains intact, we might not have to wait for any fireworks from Jackson Hole speeches by both ECB’s Lagarde and Fed Chair Powell.

If euro-dollar sees a sharp plunge, key support will come from the 1.0740 to 1.07400 region. It is around that area that price could see the formation of a potential bullish ABCD pattern, which might target a key harmonic level of 350 pips.

The key story on Wall Street remains the movement with real yields.  The yield on 10-year inflation-protected Treasuries rose above the 2% level, this is the first time it did that since 2009.  Soft landing or not, some investors won’t be able to pass up getting paid over 5% on short-term debt they can hold for a few months.

If at the end of the week, the dollar’s rally is exhausted, upside could target the 1.0925 region.  Only a daily close above the 1.1050 level would open the door for an extended euro rally.

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