Today, all eyes will be on two highly-anticipated speeches by Fed Chair Janet Yellen and ECB President Mario Draghi at Jackson Hole. Kicking off with Yellen, her speech will center on financial stability. Even though the subject suggests she may refrain from commenting on interest rates, she could always make a reference to the outlook of the US economy that indirectly conveys her policy view. Should she echo recent comments from Fed’s Dudley, who still favors another rate hike this year, markets could reprice the probability for such action, which now rests at only 39% according to the Fed funds futures. This could help the dollar recover some of its latest losses.
USD/JPY edged north after it found support once again near the 108.70 (S1) obstacle. Nevertheless, the rate found again resistance at 109.75 (R1) and retreated somewhat. The pair has been oscillating between 108.70 (S1) and 111.00 (R3) since the 28th of July and therefore, the short-term path remains sideways. Having said that, given that the latest recovery started from near the lower bound of the range, we see the case for the pair to continue trading higher. Yellen’s speech today could be the catalyst for further advances. A break above 109.75 (R1) could set the stage for more bullish extensions, perhaps towards our next resistance level of 110.35 (R2).
As for the bigger picture, the pair continues to trade within the broader range between 108.70 (S1) and 114.40. This keeps the medium-term outlook flat as well, and enhances the case for further recovery within the range. Nevertheless, we will keep an eye on a potential US government shutdown, increased speculation around which could bring the pair under renewed selling interest in coming weeks. In our view, a clear close below the key support zone of 108.70 (S1) is needed to turn the medium-term picture back negative.
Turning to Draghi, even though media reports familiar with ‘ECB sources’ suggest he is unlikely to deliver a new policy message, we believe investors will still be hanging on his lips for any hints on policy and/or the euro. That said, we think that any such remarks are unlikely to deviate from the communication at the latest ECB press conference. Back then, Draghi was explicit in stating that the conversation regarding changes to QE will take place in the ‘autumn’, suggesting he is highly unlikely to preannounce anything at a non-monetary policy meeting, especially if he doesn’t have the blessings of the Governing Council.
As such, we view the risks surrounding the euro today as being tilted to the downside. Investors looking for a preemptive QE-tapering announcement could be left disappointed, and Draghi could even mention the risk of future exchange rate appreciation as we saw in the latest ECB minutes, both of which could weigh on the currency.
On the other hand, if he doesn’t talk about the euro at all, this may signal that the Bank is not so worried about the currency. In this case, we could even see a relief rally, as traders get the ‘green light’ to renter long-EUR positions. On balance though, we think this is a lower-probability outcome than the above.
EUR/USD traded in a consolidative manner yesterday, staying slightly below the key resistance of 1.1830 (R1), which appears to be the upper bound of the sideways range the pair is trading within since the 4th of August, the lower bound of which is at 1.1660 (S2). Bearing in mind that the pair is still within this range, we consider the near-term outlook to be flat for now. Having said that though, we see the likelihood for a slide within the range, especially if Draghi appears concerned about the prospect of future euro appreciation. We expect such a slide to challenge the 1.1730 (S1) support, and if the bears are strong enough to overcome it, we believe that there is the prospect for extensions towards the 1.1660 (S2) barrier.
Switching to the daily chart, we still see a longer-term uptrend. The price structure remains higher peaks and higher troughs above the uptrend line taken from the low of the 17th April. As such, we would treat any possible slide on Draghi’s remarks today as a corrective move of that longer-term upside path. We believe that we are likely to see the resumption of the existing trend in coming weeks, given that the ECB remains set to announce QE changes soon. Although fresh data could be a game-changer, we think that a realistic scenario is one where the Bank removes it QE bias in September, thereby paving the way for an announcement in October that the pace of asset purchases may be reduced by the turn of the year.
As for today’s economic data:
We get Germany’s Ifo survey for August and US durable goods orders for July. However, there releases are very likely to be overshadowed by the aforementioned Jackson Hole speeches
EUR/USD
Support: 1.1730 (S1), 1.1660 (S2), 1,1590 (S3)
Resistance: 1.1830 (R1), 1.1900 (R2), 1.1980 (R3)
USD/JPY
Support: 108.70 (S1), 108.00 (S2), 107.40 (S3)
Resistance: 109.75 (R1), 110.35 (R2), 111.00 (R3)
