EUR/USD: The vacations are over!

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  Wolfgang Hagl
  Redaktor

It looks like Christine Lagarde’s vacation is over. In any case, the ECB President’s schedule is well filled. This morning she is in Geneva. The Frenchwoman is speaking at the International Business Council of the World Economic Forum. From there, she may be heading straight across the pond. From tomorrow, Lagarde will be attending the Fed Symposium in Jackson Hole. Central bankers, economists and media representatives will gather at the picturesque resort in the middle of the Rocky Mountains until Saturday. On the final day, the ECB chief will discuss “The policy implications of labor market transition” at a panel. The highlight of this event, however, is the speech by Jerome Powell – the head of the US Federal Reserve will take to the lectern on Friday at 18:00 our time.

Powell under pressure

The Fed has announced a presentation on its website on the topic of “Economic Outlook and Framework Review”. The audience in the conference hotel and all those attending via livestream will be paying close attention to whether and to what extent the US’s top monetary watchdog will comment on the direction of monetary policy. Expectations have recently shifted significantly. It is now considered a foregone conclusion that the US Federal Reserve will abandon its wait-and-see approach after the summer break. According to the CME FedWatch Tool, the money markets indicate a probability of just under 85% for an interest rate cut of 25 basis points to the new range of 4.00% to 4.25%. Nicolas Peter, Head of Banking & Investments at the asset management platform Aquila, agrees with the consensus. “I think the interest rate cut will be made to calm things down a little,” says the investment professional in the current payoff podcast “Börsengipfel”. He is alluding to the political pressure that has been weighing on Jerome Powell for months. US President Donald Trump has been calling loudly for an easing of monetary policy.

US inflation remains high

“I assume that the interest rate cut will be justified by the fact that the labor market is weakening,” explains Peter. In fact, the job engine in the States has slowed down considerably. In July, only 73,000 non-farm jobs were created. Economists had expected 110,000 new jobs to be created. Meanwhile, inflationary pressure remains. At 2.7%, inflation was recently well above the 2% level targeted by the Fed. The Aquila manager also points to producer prices, which rose by as much as 3.3% in July. “This data now shows for the first time that tariffs are having an effect on price levels,” says Nicolas Peter. In this respect, the interest rate cut in the USA could well be postponed from a fundamental perspective.

A speculative scenario

In any case, the coming days should herald the end of a short summer break for the world’s most important currency pair. The Euro has been treading water against the US dollar since the beginning of August. The FX pair has failed several times to overcome resistance in the USD 1.17 area. As a result, the downward trend in place since the beginning of July remained fully intact. The charts therefore point to a falling euro exchange rate. Jerome Powell could underpin this scenario fundamentally if he remains true to his line of the past few months. Despite all the tirades from the White House, the Fed Chairman wanted to wait and see the consequences of trade policy for inflation and the economy. In view of the greater than ever pressure on prices, it is quite conceivable that Powell will stick to this stance and shake up the scenario of a September rate cut. In this case, Wall Street could become uncomfortable and the dollar could gain momentum.

Of course, Christine Lagarde also has a say. The ECB meets on September 10 for its first meeting after the summer break. If the President – in Geneva or Jackson Hole – paints a skeptical picture of the economy in the eurozone, she could reinforce the bearish euro scenario.

Investment Solution

In the event that the EUR/USD actually continues its short-term downtrend, the short mini future SMOB8U would be an effective trading tool. The UBS product converts falling prices in the EUR/USD duo into profit with a current leverage of 9.7. The stop loss of USD 1.2726 is just under a tenth above the current price of the underlying. However, this distance should not obscure the fact that disproportionate losses are imminent as soon as the euro rises.