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EUR/USD: investors puzzled by Powell's message that pushes USD down. How long USD to extend weakness?

The outcome of the economic symposium in Jackson Hole did not encourage a further rally of the greenback despite the fact that Jerome Powell made hawkish remarks on Friday. The market had its own interpretation of Powell's comments as they raise doubts that the Federal Reserve could venture into the first rate hike next year. Still, the euro bulls have not benefitted from the situation. There are no pre-conditions for the dollar's trend reversal. What is going on now is a correctional decline of the greenback which actually came to an end on Friday. Today traders tried cautiously to enter the area above 1.18. However, they encountered resistance of the sellers as soon as the price had crossed the level of 1.1800. EUR/USD came under pressure of inflation data from Germany that will be discussed a bit later.

Thus, the landmark event of August has been over. Experts are mulling over the three-day summit in detail, evaluating its prospects for the US currency. Has the long-awaited summit cleared up trading sentiment? From my viewpoint, rather no than yes. That's why the greenback took a knock on Friday against major rival currencies. All in all, the Fed's leader met investors' expectations, though he didn't say anything new and definite. The hawkish point in his speech is that he didn't relate prospects of monetary tightening to the pandemic situation in the US. At the same time, in his habitual manner Jerome Powell evaded saying a clear-cut deadline for tapering the QE program. He admitted the scenario that tapering could begin later this year. He confirmed that most conditions for scaling back monetary stimulus are fulfilled, but the question still has to be discussed.


In the 20-minute keynote speech, Powell tried to speak cautiously not to rock financial markets. He coped well. On the one hand, he did not rule out the scenario of completing massive stimulus ahead of schedule which favors the dollar bulls. On the other hand, he was too cautious and flexible in his remarks. He didn't overact to the situation about the Delta variant but he confessed that coronavirus still poses short-term risks to the economy. Having appreciated trends in the labor market, the policymaker turned attention to the first sings of a slowdown in consumer inflation. He reiterated that a spike in the CPI this year is of a transitory character. Nevertheless, Jerome Powell pointed out that stricter requirements have to be met to raise interest rates than the ones necessary to scale down monetary stimulus.

Notably, experts have no common viewpoint on interpretation of the remarks made by the Fed's leader. Some analysts reckon that Jerome Powell didn't anything sensational but at the same time, he sent a message about slow and gradual tapering of stimulus programs. They believe that the regulator will hardly announce any definite moves in this direction at the nearest policy meeting, though such changes will be certainly discussed and stated in the minutes.

Other analysts think that Jerome Powell dropped a hint about tapering that will be followed by the first rate hike. Such moves could be made considerably far away from each other. Meanwhile, the US dollar has been advancing amid hawkish expectations before the central bank declares its verdict. Another thing to bear in mind is the differential between the Fed and ECB rhetoric. If it gets more apparent, this will put pressure on EUR/USD.

By the way, judging by Germany's inflation data released today, the ECB is set to maintain its wait-and-see stance. Germany's CPI dropped to zero in August on month following an increase to 0.9% in July. It is the weakest score since November 2020. Besides, the HICP also logged a negative dynamic, interrupting a three-month advance.


To sum up, the keynote speech by Jerome Powell on Friday left more questions than answers. The major message of the Fed's Chairman is that the regulator is ready for tapering its QE but there is no hurry to raise interest rates. Such a stance discouraged dollar bulls. Nevertheless, speaking about the outlook for EUR/USD, the US dollar is setting the tone in the currency pair.

Back to the technical chart. The fundamental background signals a trend reversal in the medium term. 1.1800 still serves as resistance for EUR/USD. However, if the buyers are not able to overcome and, more importantly, to hold firmly above it in the nearest 24 hours, it would be a good idea to plan short positions with the first downward target at 1.1730 that matches the Tenkan-sen line in the daily chart. The main target is seen at 1.1650 that is also the key support level matching the lower border of Bollinger bands on the same timeframe.

The material has been provided by InstaForex Company -