EUR/USD trims losses as the market braces for Fed Powells speech

• The Euro remains depressed amid generalised US Dollar strength in risk-off markets.
• Traders await Fed Powell’s speech for further insight into the central bank’s monetary policy plans.
• In Europe, a downwardly revised German GDP has increased pressure on the EUR.

The EUR/USD is ticking up from lows but remains near two-week lows around 1.1600 ahead of Friday’s US session opening. The US Dollar is thriving in cautious markets ahead of a key conference at the Jackson Hole Symposium, where the Federal Reserve (Fed) Chairman Jerome Powell is expected to provide some guidance about the central bank’s monetary policy later in the day.

A gloomy Nonfarm Payrolls report released earlier in August and a moderate US CPI report seen shortly afterwards boosted investors’ hopes of an interest rate cut in September, but later data forced them to cool their expectations. Futures markets are now pricing in a 75% chance of monetary easing in September, according to the CME Group’s Fed Watch Tool, down from above 90% two weeks ago.

On Thursday, preliminary business activity data exceeded expectations, with a significant recovery in the manufacturing sector. However, the higher-than-expected increase in weekly Initial Jobless Claims served as a reminder of the soft momentum in the labor market.

Investors are eager to know whether Powell will prioritize the labour market above inflationary risks of tariffs in the monetary policy. Fed speakers showed mixed views on Thursday. Cleveland Fed President Beth Hammack said on Thursday that the biggest concern is inflation now. Somewhat later, Boston Fed President Susan Collins showed higher concerns about the signs of an economic deceleration.

Against this backdrop, investors are wary of a cautious Powell, sticking to his “patience” rhetoric and further dampening hopes of immediate rate cuts, a likely scenario considering that there are still key labor and inflation releases ahead of September’s meeting. Such an outcome would heighten risk aversion and give an additional boost to the US Dollar.

Daily digest market movers: A cautious market and weak data are hurting the Euro

• The Euro is on its back foot on Friday while the safe-haven US Dollar appreciates, with investors wary of risk ahead of Powell’s meeting. Beyond that, German Gross Domestic Product (GDP) has been downwardly revised, increasing negative pressure on the Euro.
• The German statistics office has revised the second quarter’s GDP down to a 0.3% contraction from the previously estimated 0.1% drop. These figures reflect a significant downturn from a 0.4% growth seen in the first quarter and increase concerns about the Eurozone’s leading economy
• In the US, August’s preliminary PMIs beat expectations on Thursday. Manufacturing activity accelerated to 53.3 from 49.8 and against the market consensus of a slowdown to 49.5. Services growth eased to 55.4 from the previous month’s 55.7, yet still showing a faster growth than the 54.2 forecasted by market analysts.
• On the other hand, weekly US Initial Jobless Claims increased by 11,000 in the week of August 15, to 235,000, their highest rise in more than two months, which adds to the evidence of a softening labor market and keeps hopes of a September rate cut by the Fed alive.
• Fed speakers reflected the divergence within the committee on Thursday. Cleveland President Hammack downplayed signs of economic downturn and warned about the inflationary impact of tariffs. Chicago Fed President Austan Goolsbee showed a neutral tone, pointing to the challenges of a stagflationary economy, while Boston Fed President Collins showed openness to a rate cut in September.

Technical Analysis: EUR/USD is under bearish pressure with support at 1.1590 and 1.1560

EUR/USD broke below the bottom of the weekly trading range, at 1.1620 on Thursday, and confirmed the end of the bullish cycle from August 1 lows. The pair is now testing support at the 1.1590 area (August 11 low), with the 4-hour RSI declining, but still above oversold levels, showing scope for a deeper reversal.

Further down, the 50% Fibonacci retracement of the August 1-August 13 rally, at 1.1560, might provide some support. However, the 1.1520-1.1530 area, in the confluence of the August 5 low and the 61.8% Fibonacci retracement of the same cycle, looks like a more solid target.

To the upside, previous support at the 1.1625-1.1635 region, which held bulls earlier this week, is likely to have turned into resistance now. Above here, the next targets are the August 20 and 19 highs, at 1.1673 and 1.1693 respectively, ahead of the key trendline resistance from the July 1 highs, now around 1.1710.

Source