Title: In-Depth Analysis of the Forex Market Following Fed Chair Powell’s Speech
Original author: Marc Chandler
Source: Seeking Alpha article “A Detailed Look At The FX Market After Powell Speech, Technical Levels”
Federal Reserve Chair Jerome Powell’s recent comments at the Jackson Hole Symposium provided fresh insights into the Fed’s monetary policy stance and had a direct impact on the foreign exchange (FX) market. While Powell did not offer any groundbreaking changes in policy direction, markets responded swiftly to his reiteration of a data-dependent approach. This article delves into the technical and fundamental implications of Powell’s remarks on major currency pairs and discusses key support and resistance levels shaping FX trends in the near term.
Overview of Chair Powell’s Speech
– Powell reaffirmed that the Federal Reserve remains committed to bringing inflation down to its 2 percent target over time.
– He acknowledged the progress made thus far in moderating inflation but warned of potential risks posed by high price pressures.
– The speech maintained a balanced tone, indicating the Fed is prepared to raise rates further if needed, but also suggesting that rates could remain steady, depending on economic data.
– Markets interpreted the comments as slightly hawkish, especially after recent better-than-expected economic data in the U.S. highlighted resilience in the labor market and consumer spending.
Impact on the U.S. Dollar
– The U.S. Dollar Index (DXY) initially rallied following Powell’s comments, reaching its highest level since March earlier in the week.
– The DXY has now advanced for six consecutive weeks, likely reflecting divergence in monetary policy expectations between the Federal Reserve and other major central banks.
– U.S. yields climbed after the speech, lending further support to the dollar. The 2-year Treasury yield returned above the 5 percent level, reinforcing the expectation that U.S. rates will remain elevated for longer.
Technical support for the U.S. Dollar remains intact:
– Immediate resistance: DXY faces near-term resistance around the 104.50 level.
– A sustained break above this level could see a challenge of the 105.00 psychological mark.
– On the downside, support lies around 103.00, with a more critical level at 102.00.
Euro Weakens as Fed-ECB Divergence Grows
The euro continued to retreat against the dollar, driven by widening rate differentials and signs of economic strain within the Eurozone.
Key drivers of EUR/USD decline:
– Recent PMI data from Germany and France pointed to contraction in both the manufacturing and services sectors, highlighting recessionary risks.
– The European Central Bank (ECB) appears closer to the end of its hiking cycle, especially given the negative growth outlook.
– While ECB officials have suggested another rate hike could come in September, market participants are skeptical about the feasibility of further tightening amid growing headwinds.
Technical levels for EUR/USD:
– EUR/USD tested its 100-day moving average near 1.0830, which initially provided support.
– A breakdown below this level could target 1.0750, followed by the 1.0700 region.
– Resistance lies around 1.1000, the upper bound of the recent range; a move above that would shift momentum bullishly.
Japanese Yen Under Pressure
The Japanese yen remains one of the weakest major currencies this year, and Powell’s speech further contributed to yen weakness.
Factors affecting the yen:
– The Bank of Japan (BOJ) maintains ultra-loose monetary policy and remains the last major central bank with a negative policy rate.
– BOJ Governor Kazuo Ueda struck a cautious tone recently, reaffirming that it is too early to change policy despite rising inflation metrics.
– In contrast to tightening U.S. and European central banks, Japan’s dovish stance has left the yen vulnerable amid rising bond yields globally.
USD/JPY technical snapshot:
– The pair traded just below the July high near the 146.50 area.
– A break above this resistance would open the path toward 148
Explore this further here: USD/JPY trading.