EUR / USD has been trading in a range most of the month and is seen in an even narrower range during the week so far. Fed Chairman Powell will speak later today and his words could spark a directional movement in the currency pair.
Powell is expected to shed light on how the Fed will deal with monetary policy and inflation going forward. Given the previous fiscal measures to combat the coronavirus, both fiscal and monetary, inflation is likely to increase.
If the Fed decides to leave inflation for a while, it would be bearish for the dollar. Typically, as inflation increases, an interest rate increase is expected that strengthens the currency.
But because of a longer period in which inflation is below target, and because the economy is still recovering from the virus outbreak, monetary policy may remain accommodative for a longer period of time.
The situation in Europe differs if you take into account the comments of an ECB member yesterday. Board member Peter Kazimir said on Wednesday that the European Central Bank “is not obliged to use the entire (PEPP) envelope”. In other words, policymakers may not be using all the funding already allocated for convenience.
Technical analysis
It’s only a matter of time before EUR / USD breaks out of its range and something needs to be followed in whatever direction the pair goes, at least first.
Whether the pair start a new sustained direction may depend entirely on what Powell says today.
If the markets find it less dull than expected, there could still be an upturn, but sellers could try to defend the 1.20 range. Effectively limited profits.
The risk here is if Powell is a little hawkish. It would be unexpected and would catch the markets unexpected. In such a scenario, the dollar could rally remarkably.
Bottom line
- EUR / USD has been in a range between 1.1735 and 1.1947 for most of the month. This range could be broken later today after Powell’s speech.
- Claims about unemployment and a changed estimate of GDP figures for the US will be released in the early North American session.
Check out our economic calendar for a look at all of today’s economic events.
