EUR/USD forecast: All eyes on Warsh at Jackson Hole - Forex Friday

For much of this week, the EUR/USD has been edging lower with the US dollar regaining some ground after last week’s sell-off that was triggered, in part, by the bond market worries. Investors have been unwilling to bet further against the US dollar so far this week ahead of Kevin Warsh’s keynote speech at the Jackson Hole summit, due later today. But with the long-term bond yields refusing to fall back despite the US Treasury’s announcement of beefed up bond buy backs, the dollar could come under renewed pressure today, especially against currencies with better fiscal discipline. This makes me bullish on our short-term EUR/USD forecast.

Focus turns to Kevin Warsh at Jackson Hole

One of the reasons we saw the sizeable drop in the US dollar in recent weeks, against certain currencies, was concerns about the US debt situation. That gave rise to the so-called US-dollar debasement trade, where precious metals rallied and Bitcoin, as well as currencies of countries with better fiscal discipline outperformed the greenback.

But for much of this week, we have seen a bit of give-back in that trade. Investors are still weighing up the US Treasury’s decision to up its long-dated bond buying against still-high oil prices and sticky inflation signs. The US Treasury wants to lower rates on longer-term bonds and has suggested that there is more in their tool kit to hammer down yields.

But the dollar debasement trade hasn’t gone away, with gold and Bitcoin consolidating recent gains, while the likes of the AUD, NOK and CHF all remain near recent highs against US dollar. This so-called 'debasement' trade will be put to a further test today with the Fed Chair Kevin Warsh's speech, which could prove decisive for the dollar.

Warsh will need to convince the market that they will get inflation under control, and that their actions could help flatten the yield curve, else the dollar will likely remain under pressure. But given the fact he doesn’t like to give forward guidance, it is difficult to see how he will do that. Risk assets could nevertheless remain supported if he acknowledges the recent weakness in US data. If he does, then this would effectively rule out a rate hike in September, which should be dollar negative.

So, unless yields start to head more decisively lower, the pressure will likely remain on the US dollar, with currencies of countries with better fiscal discipline, like the Norwegian Krone and Swiss franc, likely to remain supported. For the same reason, investors may continue to prefer the euro over the US dollar.

Technical EUR/USD forecast and levels to watch

Following last week’s rally, the EUR/USD has been consolidating in a tight range for much of this week. Price has been declining modestly inside what appears to be a falling wedge pattern – a bullish continuation formation. A potential breakout above the resistance trend of this pattern could see the pair re-test recent highs near 1.1700 handle.

The next level of potential resistance on the EUR/USD is seen around 1.1800 where the 61.8% Fibonacci retracement level converges. On the downside, initial support is seen around 1.1620/30 area, with 1.1600 and then 1.1575 being the subsequent supports to watch. The latter is the base of the breakout from last week, and as such, it will need to hold firm for us to maintain our short-term bullish EUR/USD forecast.