Jignesh Davda
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EUR/USD edged lower shortly after the European open and continues to hold within a range between around 1.1800 and 1.1840.

Investors may stay on the sidelines ahead of a speech from Fed Chair Jerome Powell on Thursday. The speech will reveal how the central bank plans to conduct monetary policy and handle inflation after earlier easing measures because of Covid-19.

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There is speculation that the Fed may shift its stance and allow inflation to run above its 2% target. This is to accommodate a longer than usual period where inflation has been running below targets.

The implication is that if the Fed is willing to let inflation overshoot, then they are not thinking about tightening monetary policy anytime soon. This, in turn, has bearish implications for the US dollar.

The markets appear to be positioned for such a scenario when considering recent moves in real yields. If the Fed doesn’t adopt this new stance, which has been coined inflation averaging, it could throw some market participants off guard and lead to a sharp upswing in the dollar.

Technical Analysis

EURUSD 4-Hour Chart

EUR/USD has traded sideways for most of the month and the range has narrowed in the early week. As investors may not want to position before hearing from Powell, the session ahead is likely to be a quiet one.

Several media outlets are stating that volatility could be much higher than usual tomorrow because of Powell’s speech. This will largely depend on what is said and how significant any shifts in monetary policy may be.

Range support for EUR/USD is seen at 1.1735 while last week’s rally was met with resistance at 1.1947. These may be levels to be mindful of tomorrow.

For the session ahead, 1.1820 offers a small hurdle while more important resistance is found at 1.1843. To the downside, notable support is seen at 1.1781.

US Durable goods orders will be released later in the North American session. If the pair moves with momentum on the back of the release, in any direction, it may offer a short-term trading opportunity to play the range.


Bottom Line

  • The range in EUR/USD is narrowing and this is likely to continue ahead of tomorrow’s Jackson Hole Symposium.
  • Market participants might be hesitant to bet against a dovish outlook from the Fed. For that reason, there is some risk of a sharp dollar rally if the Fed chair disappoints.

For a look at all of today’s economic events, check out our economic calendar.

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