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Where is EUR/USD headed? There's a belief that one must monitor the pair's reaction to key events to answer this question. Initially, the U.S. dollar weakened on Jerome Powell's comments in Jackson Hole, but later regained its position. This indicates the resilience of the American currency and allows Bank of America to forecast a drop in the euro to $1.05 by the end of 2023. However, initially, the regional currency may slightly strengthen in anticipation that the federal funds rate will remain unchanged in September.
The market's reaction is undoubtedly essential, but often it is based on a speculative factor. Looking at the uncertainty in the bond market, Powell might be rubbing his hands with satisfaction. He left investors precisely where he wanted them: uncertain about the Federal Reserve's next moves. Will the Fed either tighten monetary policy or keep borrowing costs at their current level? The market is discussing another option—a rate cut. It's no surprise that asset managers and hedge funds hold opposing positions on 10-year bonds.
Dynamics of speculative positions in U.S. Treasury bonds
The dynamics of their yields play a significant role. In August, its rise to the highest levels since 2007 made the U.S. dollar feel like the king of Forex. However, the wind may change in September. If U.S. employment statistics disappoint, Treasury bond rates will drop, and EUR/USD will soar.
Powell diverted investors' attention from other speakers. It would be worth paying attention to Christine Lagarde. The Frenchwoman described the European economy quite accurately, where Inflation is higher than in the U.S. due to negatives like the energy crisis and the armed conflict in Ukraine. Moreover, the ECB started tightening monetary policy later than the Fed.
Dynamics of European inflation
At the same time, the head of the European Central Bank believes that by the end of 2023, inflation in the eurozone will be much lower than it is now. If Frankfurt's policy is data-dependent, disappointing PMI statistics, growing recession risks, and a gradual slowdown in CPI should increase the likelihood of a policy pause in September. Derivatives with a fifty-fifty probability indicate that the deposit rate will remain at 3.75% next month. The chances of it increasing to 4% by the end of 2023 have dropped from 100% to 80%.
However, not everyone agrees with the pause. European Central Bank Governing Council member Robert Holzmann believes there will be no economic downturn, and a robust labor market increases the likelihood of wage and price increases. Rates should be raised further.
Technically, as expected, EUR/USD fluctuates around the pivot level of 1.08. It serves as a kind of red line. Meanwhile, breaking through resistances at 1.084 and $1.0865 will pave the way for buying the euro. Conversely, a close below $1.08 will create the basis for sales.
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