Global financial markets are in the wait-and-see mood ahead of Jerome Powell's testimony at an annual symposium in Jackson Hole. Low volatility across trading floors in the first half of the trading day comes from the empty economic calendar. Yesterday, the US released a dismal consumer sentiment index which is a crucial metric of economic health. Nevertheless, the index did not make much impact on EUR/USD.
Sellers of risky assets should push 1.1785 down. This move will reinforce pressure on EUR/USD. Under this scenario, the currency pair will pull back to the lows of the previous week from where the door will be open for a deeper decline towards 1.1710. In case the pair retains the key support of 1.1650, the downtrend which took shape on August 19 will be over. From that support, EUR is likely to resume the uptrend. If the bulls can resist selling pressure, EUR buyers will regain control after resistance of 1.1840 is broken. This move will open the door towards Friday's highs of 1.1890 and the highs of the last week of nearly 1.1960.
Tomorrow's testimony by the Fed's Chairman will provide conclusions that could be drawn from the revision of monetary policy. Most likely, we will talk about revising the target inflation rate, which will be shifted slightly forward, within the range of 2% -2.5%. This has already been said by the Fed's officials and it will not bring anything new to the market. However, volatility could jump if Powell says that changes in monetary policy will take place only when the economy reaches the aforementioned inflation limit and the unemployment rate returns to its lowest levels. Hints of further easing of monetary policy and expansion of the bond buying program in November this year could deal a blow to the US dollar. Besides, the Fed may update its forward guidance in November.
Do not forget that the coronavirus has not been defeated yet. Thus, it is still derailing both the global economy as well as the US and the EU economies. Apparently, the period of rapid growth of the single European currency and risky assets, which has been recorded this summer, is gradually coming to an end. So, the market is expressing realistic sentiment on the eurozone's prospects. Volatility will increase in case of the second COVID-19 wave in the fall-winter period. Meanwhile, there is uncertainty about the long-term impact of the coronavirus on forex rates.
One economic report at the end of the last week quickly got the risky asset buyers back sober. Let me remind you that the preliminary manufacturing PMI for the eurozone fell to 51.7 in August, weaker than the expected growth to 53.0 points. Services PMI dropped to 50.1 points in August from 54.7 points in July. As a result, the preliminary composite PMI for the eurozone sank to 51.6 points in August. This suggests that it doesn't make sense to wait for a V-shaped recovery. Besides, the rapid recovery, which is likely to end in August this year, will be followed by a stage of smoother growth with constant dips. Another thought, don't forget about the high probability of the second lockdown due to the coronavirus resurgence, which may be re-imposed this winter.
The report on consumer confidence in France revealed that French consumers are not so optimistic about the future. This is another sign that the period of dazzling growth of risky assets is coming to an end. Most likely, in the third quarter this year, consumer confidence will gradually weaken, as the governments are scaling back their programs of financial aid to the population. According to Insee, the consumer confidence index in France remained unchanged in August at 94 points as in July. The indicator for assessing households' own situation remained in positive territory, while the indicator for assessing the economic situation as a whole remained negative. The indicator will grow after the situation with the coronavirus is completely taken under control.
Despite this, the French economy will be one of the leaders in terms of recovery in the third quarter of this year, in contrast to Spain and Italy. The French government has timely provided stronger fiscal support which is directly related to lower borrowing costs than in the neighboring countries. Fir instance, in Italy and Spain high debt burden and very large public spending before the crisis crippled the economy during the coronavirus pandemic ...
