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EURUSD - what to expect from Jackson Hole?

Summary:

  • Mario Draghi will deliver a key speech at Jackson Hole on Friday (8pm BST)
  • Investors will look for details, lack of those could end in disappointment
  • EURUSD could break out of the consolidation

Jackson Hole speeches from Janet Yellen and Mario Draghi are the most anticipated market events in August, particularly in the case of the ECB president where we can get a market mover that could determine the fate of the EURUSD rally. Here we present the key issues and take a look at the chart. 

Let’s start with the fact that the ECB still buys 60 billion euros of bonds per month and holds a deposit rate at -0.4%, a record low. That policy may not be adequate given a strong recovery that has presented this year and traders expect changes to be announced at the ECB meeting in September. However, because Jackson Hole symposium has been often treated as a spectrum for major announcements regarding monetary policy, many investors expect Draghi to deliver a tightening plan on Friday.

What could help the euro?

The euro could gain if Draghi makes it clear that the ECB is ready to start reducing bond purchases no later than January 2018. The more details the better. In the most optimistic scenario for the euro, Draghi could also hint at a rate hike possibility in 2018.

What could hurt the euro?

There are two scenarios that could be euro negative. First, Draghi could lay out a plan to reduce bond purchases but assure investors that rates will be unchanged in 2018. Second, Draghi could just say nothing specific beyond what is already obvious: that we see a recovery in Europe and some policy changes in the future will take place. 

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Net speculative positioning in the euro is close to all time highs. Source: Bloomberg 

Investors should consider the fact that the EURUSD has witnessed a major rally, as Europe recovers and the Trump presidency disappointing markets. As a result, euro net speculative positioning is close to all-time highs. 

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The last phase of the bull market on EURUSD has not been backed by the bond market. Source: Bloomberg, XTB Research 

Furthermore, the latest phase of the EURUSD rally has not been supported by changes on the bond markets. We can see that the bond yield has actually declined recently. 

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EURUSD remains in a consolidation above the long-term zone that now serves as a support. Source: xStation5 

Moving to the EURUSD chart, we can see that the pair is locked in a consolidation at the highs. This consolidation takes place above the long term zone that has been broken - an important argument for bulls. The last such consolidation (May to June) has been concluded with a decisive break higher. However, do notice that the pair has not seen a correction since early April. Should a correction of this range occur, a level of 1.1575 could be tested but the pair would remain in a longer term upward trend. 

 

 

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