Temporary pause after Powell? Euro is overbought and could take a breather

  • EUR/USD has been rising after Fed Chair Powell refrained from hinting at imminent tapering.
  • Eurozone inflation figures and speculation about the next moves 
  • Monday’s four-hour chart is showing the pair is in overbought territory.

No smoking gun – Federal Reserve Chair Jerome Powell has refrained from hinting that the bank is about to withdraw stimulus immediately, and that has sparked a rally in markets and a selloff of the dollar. The dust may begin to settle soon.

Powell used past tense, saying he “thought” it would be appropriate to taper down the Fed’s $120 billion/month bond-buying scheme this year, but added that the Delta covid variant added uncertainty. While he acknowledged significant improvement in the labor market, he went a long way to explaining why he thinks the recent rise in inflation is only transitory

Federal Reserve Chair Powell: Make me a rate hawk, but not yet

The Fed Chair’s all-important Jackson Hole speech came after scores of his colleagues took to the airwaves to support printing fewer dollars, raising expectations for tapering hints. That contributed to the market reaction, which was swift. EUR/USD topped 1.18, the highest level in three weeks. 

Markets will likely remain obsessed with the timing of tapering and the next significant publication is this Friday’s all-important Nonfarm Payrolls report. The other side of the week is far off, perhaps allowing traders to take profit on dollar shorts. A bank holiday in the UK can help smooth the trend. 

Powell Quick Analysis: Dove defeats the dollar, without a strong NFP, forget about tpaering

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Nevertheless, any such correction will likely be temporary. One of the reasons that the dollar declined was Powell’s insistence that ending the bond-buying scheme does not imply a rate hike coming immediately afterward. His colleagues’ opinions are similar to his on that specific topic.

Apart from speculating on the Fed’s next moves, preliminary Geman consumer prices for August are eyed and they are set to show moderation in monthly gains. European Central Bank member Francois Villeroy de Galhau came out and was ahead of the publication to say that there is no risk of higher inflation at this point. On the other hand, Spain’s inflation hit 3.3% YoY in August, hotter than estimated. 

COVID-19 headlines could also move markets. Infections continue rising in the US, but the pace has slowed down, while European statistics are flat on aggregate. The Western world is currently awash with vaccines, allowing the economies to recover.

Overall, there is room for the dollar to bounce from the lows, yet probably only temporarily. 

EUR/USD Technical Analysis

Euro/dollar is overbought – according to the Relative Strength Index (RSI) on the four-hour chart, which has surpassed the 70 level. That implies a downside correction. Other indicators such as momentum remain upbeat. 

Support awaits at 1.1780, which caped the pair last week and where the 200 Simple Moving Average (SMA), followed by 1.1740, which is where the 100 SMA awaits. Further down, 1.1725 and 1.1695 are of interest. 

Resistance awaits at 1.1810, the post-Powell high, followed by 1.1825, which provided support in early August. The next lines to watch are 1.1860 and 1.1910. 

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