Federal Reserve, Jackson Hole, Average Inflation, EUR/USD – Talking Points:
- Risk appetite notably improved during Asia-Pacific trade on the back of cooling geopolitical tensions and vaccine optimism
- The upcoming Jackson Hole symposium may dictate the near-term outlook for the haven-associated US Dollar
- EUR/USD rates seem poised to rise as price carves out a Bull Flag at key resistance.
Asia-Pacific Recap
A broad risk-on tilt was seen throughout Asia-Pacific trade as cooling US-China trade tensions and coronavirus vaccine optimism buoyed equity markets.
The Australian ASX 200 index climbed 0.52% alongside S&P 500 futures as the haven-associated US Dollar and Japanese Yen lost ground against their major counterparts.
Crude oil nudged higher alongside the commodity-sensitive Australian Dollar, whilst EUR/USD rates bounced back above 1.18.
Looking ahead, US new home sales for July headline a rather light economic docket as investor’s turn their attention to Federal Reserve Chair Jerome Powell’s speech on Thursday at the Jackson Hole Economic Policy Symposium.
Market reaction chart created using TradingView
Spotlight on Jackson Hole Symposium
The eyes of the investing world will turn to the Federal Reserve’s annual Jackson Hole symposium on Thursday where Chairman Jerome Powell is scheduled to deliver a speech titled “Monetary Policy Framework Review”.
Powell’s much awaited speech is expected to shine a light on the idea of average inflation targeting, which has been suggested by several Federal Open Market Committee (FOMC) members including Minneapolis Fed President Neel Kashkari, who believes that the central bank “must walk the walk and actually allow inflation to climb modestly above 2%” before rolling back existing stimulus measures.
With policymakers backing away from “providing greater clarity regarding the likely path of the target range for the federal funds rate” at the FOMC’s monetary policy meeting in July, a lack of meaningful guidance from the Fed Chair could significantly sour investor sentiment.
However, this seems relatively unlikely given the Federal Reserve’s commitment “to using its full range of tools to support the US economy in this challenging time, thereby promoting its maximum employment and price stability goals”.
Therefore, with the current US unemployment rate remaining above the peak seen in the 2008 global financial crisis (10.2%) and consumer price inflation still well below 2%, it appears accommodative monetary policy settings are here to stay for the foreseeable future which in turn may continue to hamper the US Dollar against its major counterparts.
Nevertheless, the Greenback could stage a short-term rebound if Powell’s speech disappoints market participants, probably resulting in a marked pullback in EUR/USD rates.
United States Core Inflation
Source – TradingEconomics
EUR/USD Daily Chart – Price Consolidating in Bull Flag
EUR/USD rates continue to consolidate in a Bull Flag continuation pattern just shy of psychological resistance at the 1.19 level.
Hidden bullish RSI divergence, alongside the steepening slopes of the 50- and 200-day moving averages, suggests the path of least resistance is higher.
With that in mind, a daily close above the flag midpoint (1.1832) may open the door to retest the monthly high (1.1965).
A breach of key resistance at the psychologically imposing 1.20 level is needed to validate a topside break of the bullish continuation pattern, with the implied measured move indicating a push to 1.22 could be in the offing.
EUR/USD daily chart created using TradingView
-- Written by Daniel Moss, Analyst for DailyFX
Follow me on Twitter @DanielGMoss