Hey! This is Philip with our new weekly outlook of the Forex market.

 

 

 

Fed Chairman Powell used the opportunity at Jackson Hole to institute an average inflation targeting (AIT) policy, delivering on market expectations for the most part. He didn’t specify for how long the Fed will let inflation overshoot above the 2% target or by how much, leaving the policy change flexible at this stage. One thing is certain, though, and that is that the new AIT policy will keep US interest rates low for longer. This is, of course, bearish for the dollar by definition.

The USD downtrend has already traveled far at this stage, meaning a correction is still possible.  Namely, remember how the USD fell initially and then rallied strongly on Powell’s AIT announcement last Thursday. As we have said for weeks, short dollar exposure is extended, and that amplified a “buy the rumor sell the fact” reaction around Powell’s speech. The dollar index (DXY), however, resumed the downtrend on Friday and begins this week near 2-year lows.

Higher volatility in USD pairs may carry on this week spurred by a busy economic calendar. The highlight is Friday’s Non-Farm payrolls, while the ISM manufacturing and services PMIs will also be closely watched. Stronger numbers than the forecasts may offer some support for the dollar, and possibly even trigger that correction finally.

 

 

Now that average inflation targeting is made official in the US, the obvious and immediate question on everyone’s mind is, how long before the ECB follows suit? When we consider that the Eurozone inflation outlook is even more subdued than the US’, then it’s clear why the ECB will most probably opt for more monetary easing later this year. Also, remember that Lagarde announced a major policy strategic review at the ECB when she took office, and the papers may be ready in a few months. Can we expect big policy changes at the ECB as well? Most likely. This is a reason why the euro currency may be due for a correction at this stage, especially after a 10% appreciation versus the USD and stretched long EUR positioning.

Turning to this week’s EUR calendar, the core and headline CPI flash (preliminary) reports will be in focus. Both are expected to decline notably from the prior month’s readings. The risks for the euro here are if the declines are larger than the forecasts; - this could also trigger the anticipated downside correction in EURUSD.

 

 

EURUSD resumed the move higher last week, though it didn’t break above the previously established high around 1.1960. The pair continues to trade within the now well-established formations with the key support trendline rising gradually higher with the trend. Last week, we said the 1.17 area is the key support, but that is slowly moving up with the ascending lines. In the following two weeks, it will be getting closer to 1.18. Thus, the 1.18 zone is soon likely to turn into the key support for EURUSD.

That support at 1.18, if it gets tested, will either hold or break. A bearish breakout would then most likely trigger a deeper pullback. The most probable target area lower is the 1.15 zone.

In the contrary scenario, a forceful move above 1.20 can propel this leg higher in an extension of the larger bull trend. Judging by the channel formation, such a move can extend toward 1.22 over the next two weeks.

 

 

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Best Regards,
Philip
Senior Forex Manager
FX Trading Revolution
w: www.fxtradingrevolution.com 

e: philip@fxtradingrevolution.com