The euro snapped an eight-week winning streak versus the dollar, as the greenback staged a decent comeback during the second half of the week. The dollar’s recovery was ignited by FOMC minutes on Wednesday and extended through Friday, with the EUR/USD pair pulling back from a 27-month high of 1.1965 to a low of 1.1753.
The message from the Federal Reserve was dovish. Still, the board seemed reluctant to introduce yield curve control as a monetary policy tool as they judged that “yield caps and targets would likely provide only modest benefits in the current environment.”
While the Fed minutes acted as a catalyst, a technical correction fueled the greenback’s bounce across the board. The dollar index (DXY), which measures the value of the USD against a basket of currencies, recovered from an over-two-year low of 92.13, still the upward move faltered at the mid-93.00’s area.
Correcting lower, trend intact
While the current momentum points to a consolidation in EUR/USD, the bias is tilted in favour of the US dollar, although, the primary trend still points to the upside. Analysts at ING point out the pair could briefly dip under 1.17 if the correction gains momentum, but they “do not see wholesale changes taking place to the factors which have driven the rally and thus are happy to keep a one-month target at 1.20.”
In the same line, at Nordea, they argue the European Central Bank (ECB) is probably not ready to accept levels above 1.120 without a battle. “They managed to temporarily temper the EUR/USD momentum in August and September 2017 when sources kept leaking stories to Reuters and Bloomberg every time 1.20 was breached. We are on alert of a similar rhetorical intervention from Frankfurt should the EUR/USD gain too fast again this autumn.”
US headlines will probably continue to be around politics, with the Republican convention underway, but for markets, economic data and what Jerome Powell has to say at the Jackson Hole Symposium will probably matter more. Market participants will look for potential signs about what the Fed might do next. The possibilities go from introducing an Average Inflation Targeting to a Yield Curve Control. If the Fed’s Chair offers new clues, the currency market will likely move sharply, including EUR/USD.