Will the Fed Move the Needle at Jackson Hole for the Most Liquid Currency Pair?

EUR/USD, Fed, Powell, Inflation, US Dollar, China, Jackson Hole – Talking Points

Markets remained subdued ahead of the Jackson Hole symposium.
Fed-speak around inflation expectations will be closely watched
EUR/USD liquidity may be short on surprises. Will the Euro downtrend resume?

Increasing Covid-19 Delta variant cases in Asia continue to cause concern, particularly in China, which weighed on Hong Kong’s Hang Seng Index (HSI) stock benchmark as well as indices on mainland China. Other bourses were little changed in the session. The Bank of Korea raised rates by 25 basis points today to 0.75%, with BOK Governor Lee saying that Fed policy will be important for future direction. Strong private capex data in Australia, showing a rise of 4.4% against 2.5% expected, left AUD little-changed.

With Jackson Hole almost upon us, the focus will be whether Fed Chair Powell will maintain a transitory view of inflation or tilt the rhetoric more toward structural inflation. Going into the symposium, the market believes the Fed and their inflation expectations.

Inflation is currently being priced at or near 2.5% all the way out the curve, with the benchmark 10 year breakeven inflation rate at 2.35%. The “breakeven” is the difference between the yield on a US Treasury bond and the equivalent tenor Treasury Inflation Protected Security (TIPS).

US Market Priced Inflation (Break-evens)

Source: Bloomberg

There has also been market chatter about when any tapering effort might end. While this is an important aspect of the overall story, the market appears to be getting ahead itself. As with most projected outcomes in markets, it depends. The one thing the Fed has made clear is that unfolding circumstances will determine the trajectory of tightening.

There is also US jobless claims and US GDP data out tonight that may impact markets. An explosion in volatility may see some markets gap. The most traded currency pair, EUR/ USD, could see more interest than usual as participants gravitate toward more liquid markets should the Fed deliver something unexpected.

EUR/USD Technical Analysis

The Euro made new lows last week and despite a rally this week, it remains trending lower within a channel chart formation. Should volatility break out, the big levels to watch for resistance will be 1.1910, the most recent high, and 1.2095, the pivot breakdown level. Support at 1.1600 will be critical as a breach could suggest an acceleration in the downtrend.