After an important and exciting event, the US dollar remained stronger against the rest of the other major currencies, when Jerome Powell returned to confirm that the continued strength of the American economy may require further increases in interest rates. Accordingly, the price of the euro currency pair against the US dollar EUR/USD moved towards the support level of 1.0765 at the end of last week's trades, which is the lowest for the currency pair in more than two months and closed the week's trades stable around the 1.0795 level.
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At the same time that the Jackson Hole seminar took place Christine Lagarde, president of the European Central Bank, said interest rates in the European Union would need to remain high "as long as necessary" to slow inflation, which remains high. She also said: "Despite the progress being made, the battle against inflation has not yet been won."
Lagarde's statements came at the annual conference of global central bank governors in Jackson Hole, Wyoming, against the background of the European Central Bank's efforts to manage the stagnant economy with rising inflation rates. The central bank raised the standard interest rate from minus 0.5% to 3.75% in one year - which is the fastest pace of its kind since the launch of the euro in 1999. The rise in interest rates has led to an increase in the cost of borrowing for consumers to buy a house or a car or for companies to obtain loans for expansion and investment. The inflation rate in the 20 countries that use the euro has fallen from the peak it reached last year (10.6%) to 5.3%, which largely reflects sharp declines in energy prices. But inflation still exceeds the European Central Bank's target of 2%.
Moazzam Khattab Lagarde focused on the turmoil in the global and European economies which may require higher interest rates for a longer period than expected before the pandemic. These challenges include the need to boost investment in renewable energy and address climate change, the rise of international trade barriers since the pandemic, and the problems caused by the Russian invasion of Ukraine. Lagarde added by saying: "If we also face larger and more common shocks - such as energy shocks and geopolitical shocks - then we can see companies passing on cost increases more consistently."
Her speech followed a speech by Federal Reserve Chairman Jerome Powell earlier Friday in Jackson Hole, who similarly said the Fed was prepared to raise US interest rates further if US growth remains too strong to moderate inflation. The double whammy of still-high inflation and rising interest rates pushed the European economy to the brink of recession, although it grew by 0.3% in the April-June quarter compared with the first three months of the year.
Lagarde was previously non-committal on whether the European Central Bank would raise interest rates at its next meeting in September, although many analysts expect it to skip a rate hike due to the weak economy. And Moazzam focused her speech last Friday on whether long-term economic changes will keep inflationary pressure high. She pointed out, for example, that the shift away from fossil fuels "is likely to increase the size and frequency of energy supply shocks."
Expectations of the euro against the dollar today:
- The general trend of the EUR/USD currency pair is still downward.
- The break of the psychological support 1.0800 confirms the bears' control over the trend and moves the technical indicators towards strong selling saturation levels.
- I would rather consider buying the EUR/USD pair without risking from the 1.0720 and 1.0645 support levels respectively.
- On the other hand, and in the same period of time, there will be no reversal of the current downward trend for the currency pair without returning to the psychological resistance of 1.1000 again.
I expect a quiet trading session today and the currency pair may remain in narrow ranges with its downward slope until the reaction to the announcement of the US jobs numbers this week.
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