The dollar continues to lose its position, maintaining a kind of persona non grata status in the foreign exchange market. After the high-profile speech of Federal Reserve Chairman Jerome Powell at the Economic Symposium in Jackson Hole, the greenback was actively disposed of – which includes being in favor of the euro. The dovish comments of some Fed officials following Powell's speech only reinforced the negative attitude towards the greenback. The dollar index is at multi-month lows, falling to 91.82 points. The last time the indicator was at such lows was in April 2018. August Nonfarms, which will be published at the end of this week, may provoke a new wave of a dollar sell-off – certain prerequisites indicate that the release will be below the forecast values. However, Friday is still a few days away, and the dollar is actively getting cheaper right now. No sooner had the dollar bulls recovered from Powell's rhetoric when Fed officials Richard Clarida and Raphael Bostic reinforced the chairman's dovish position.
Let me remind you that last week, the Fed chief announced that the central bank has decided to revise its strategy. De facto, pushing back the hypothetical date of the interest rate hike to a more distant date, saying that the regulator would allow inflation to exceed two percent. The dollar initially reacted rather restrainedly to this news. The fact is that on the eve of Powell's speech, the market has screwed itself up too much regarding the implementation of more pessimistic scenarios. And only due to the fact that these scenarios did not materialize, the dollar kept afloat in the first few hours following Powell's speech. But then the scales eventually tipped against the US currency.
And this, in my opinion, is quite logical. Firstly, the central bank raised the bar, if exceeded, the Fed members will return to the issue of increasing the rate. And although Powell did not talk about a 3% inflation target (rumors about this were actively circulating in the market), the 2% target also needs to be reached. In addition, now the task has become more complicated: not only is it necessary to reach the 2% level, but now they also need to gain a foothold above it. And this path does not promise to be simple and short, given the coronavirus situation in the United States, weak wage growth and a weak level of US consumer activity.
Such pessimistic prospects were confirmed by Powell's colleagues - Richard Clarida and Raphael Bostic. In particular, the head of the Federal Reserve Bank of Atlanta, Bostic, said that the American economy was recovering at an active pace at the beginning of the summer, but recently many indirect data indicate signs of a slowdown. In turn, Fed Vice Chairman Clarida also made a very dovish statement. According to him, "a decrease in the unemployment rate in the absence of an increase in inflation will not be a sufficient trigger for a rate increase."
It is worth noting here that the US labor market may unpleasantly surprise dollar bulls this week. At least indirect indicators show contradictory dynamics. First of all, we are talking about an increase in the number of initial applications for unemployment benefits. This indicator has been steadily declining for 11 weeks (starting in May), reflecting the recovery of the American labor market. But then the weekly figures began to come out in different ways, often exceeding the forecast values. For example: according to forecasts, the number of initial applications was expected to grow by 930,000 the week before last. But in reality, the indicator jumped by 1,106,000. A similar situation occurred last week. With the forecast growth of 980,000, the indicator increased by 1,600,000 applications. Given this dynamic, we can assume that the August Nonfarm will be worse than July, as the key indicators are two weeks behind the reports on applications for unemployment benefits.
The ongoing political battles in the United States (including over the new stimulus package) are putting additional pressure on the greenback. US President Donald Trump has caught up with his main rival Joe Biden in many key states, so in the near future we can expect further heat in the American political arena. Amid this confrontation, the Republican bill on the allocation of $1 trillion in additional aid to the US economy remains inactive.
If we talk directly about the euro-dollar pair, then trading decisions must be made after today's release on the growth of European inflation. If the indicators come out worse than rather weak forecast values, then a price correction is likely - up to the bottom of the 19th figure. But under current conditions, any price downturn should be used as an excuse to open long positions. The main target of the upward movement in the medium term is at 1.2050 (the upper line of the Bollinger Bands indicator on the weekly chart).
