With 175 basis points of hikes this year, the European Central Bank (ECB) has been more aggressive than its US counterpart, which has slowed down the pace of tightening in 2023 with 100 basis points. This differential has supported EUR/USD and helped it reach the highest levels in over a year in mid-July.
The Euro's rate advantage however has eroded over the past several weeks, as after the last ECB policy meeting Ms Lagarde refrained from offering its usual hawkish guidance and instead, she opened the door to a September pause. Europe's economic engine is sputtering, since Germany is in a technical recession and yesterday's preliminary PMIs confirmed the poor state of Eurozone's economy, raising the bar for future hikes. On the other hand, more work is needed on the inflation front, which remains far from target.
Fed Chair Powell also kept all options on the table, as inflation is coming down and the central bank may have already done enough. However, the higher-for-longer narrative and prospects for more hikes are gaining traction recently, following strong data points and hawkish minutes. Even though Wednesday's PMIs were not good, the economy performs quite well and the labor market is tight despite signs of easing.
Markets now turn to the Jackson Hole Symposium, in hope of more insights around the intentions of both central banks, amidst highly uncertain monetary policy outlook. Both Mr Powell and Ms Lagarde are expected to deliver speeches on Friday. Their comments could determine the trajectory of the common currency and the greenback.
The shift in the policy differential has driven EUR/USD into a losing streak over the past five weeks and to a precarious position. It tested the 200Days EMA and this creates risk for further losses towards 1.0634-11.
The 200Days EMA however, has contained this year's pullbacks multiple times. Similar outcome would give EUR/USD the opportunity to push back into the Daily Ichimoku Cloud, but does not inspire confidence for a larger recovery past the upper band (up to 1.1100)
Senior Financial Editorial Writer
Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.
With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.