EurUsd Weekly Outlook for August 28, 2023 – A Gray Cloud from Jackson Hole

• Powell doesn’t disappoint markets, but also doesn’t yield to the idea of a Fed that abdicates its role on inflation. The American economy is too robust to consider lower interest rates at this moment.
• Lagarde follows Powell’s approach, embracing cautious aggressiveness. In Europe, the fight against inflation is not yet won, and interest rates will remain high for an extended period in an attempt to bring consumer prices back to around 2%.
• EurUsd is once again targeting the 200-day moving average. Holding the 1.08 level is critical to continue seeing an uptrend for the euro.

Powell and Lagarde, Tackling Inflation

Markets have appreciated the caution shown by Powell in his speech at the Jackson Hole symposium. Although stating that the challenge of inflation is ongoing and not ruling out further restrictive measures on interest rates, the Federal Reserve Chairman has signaled the possibility of a pause for reflection in September to understand the evolution of macroeconomic data. According to Powell, high consumer demand and wages pressures necessitate maintaining high interest rates for an extended period, even increasing them if needed. However, the statement “the Fed will proceed cautiously in deciding whether to further tighten or instead hold the benchmark rate steady and wait for additional data” has buoyed the markets. The Fed still aims to return to a 2% inflation rate in the upcoming months.

Christine Lagarde, the President of the European Central Bank (ECB), was also circumspect about what the European central bank might decide concerning interest rates in September. The battle against inflation in Europe is far from over, Lagarde stated at Jackson Hole, and interest rates will remain at restrictive levels as long as necessary to curb rising prices. These remarks essentially follow the logical thread set by Powell that the inflation fight is not yet won.

Lagarde’s comments on the impact of climate change on the economy and consumer prices were particularly noteworthy. This shift could signal structurally higher levels of inflation in the coming years as production processes are steered towards decarbonization. Interest rates will therefore remain restrictive for an extended period in Europe as well.

Technical Analysis – EurUsd, a Bearish Breakout Underway?

The 200-day moving average is once again at the interface between the strengthening of the dollar and a resumption of the uptrend for the euro. For the time being, the rise in the European currency that started in 2022 has been proceeding very harmoniously. It has had three increasing highs and three increasing lows. These lows have always found the 200-day moving average as a containment support to re-energize the euro’s action. After Jackson Hole, the EurUsd is once again targeting the support currently positioned at 1.08. A breach below this level for the dollar would open up a very interesting scenario.

Confirmation that this moment could be crucial for the fate of EurUsd is also evident from the performance of the oversold RSI oscillator. As seen from the chart, every time the euro has found the strength to rebound over the last year, the oscillator has picked up a low with its oversold indicator. Conditions today are ideal for a EurUsd rebound. A bearish breakout would be detrimental to the European currency.