For two days in a row, the price of the euro currency pair returns against the US dollar EUR/USD, rebounding higher with gains above the resistance level 1.0892. It retreated from recent selling operations, moving in its wake towards the support level 1.0765, its lowest in more than two months. This gain came from the negative reaction from numbers lower than all expectations for the reading of American consumer confidence and the decline in the number of American job opportunities.
Last week, the US Federal Reserve Bank of Kansas held its annual meeting of global central bank governors in Jackson Hole, Wyoming. Central bank governors, senior policy makers and economic thinkers gathered to discuss the latest trends in the global economy and set an agenda for future research. Although inflation has been the preoccupation of policymakers over the past two years, the officials chose the title of the conference "Structural Transformations in the Global Economy."
This refocusing may be due in part to the Fed's success in reducing inflation to more manageable levels.
The main questions discussed during the three-day conference relate to how the permanent structural transformations affect the long-term paths in the global economy, bring about changes in the financial markets and monetary policy, restrict long-term growth, transform global production networks, restructure the global economy. and the allocations in global supply chains, which affect global financial flows.
However, inflation still poses a serious threat.
Although the subject of the discussions was about the structural changes, the governor of the American central bank, Powell, confirmed the message of last year, indicating that the Federal Reserve Bank is committed to bringing inflation to the level of 2%. Crucially, Powell pointed out, "Although inflation has come down from its peak - a welcome development - it is still very high. We are ready to raise interest rates further if that is appropriate, and we intend to keep the policy at a restricted level... the process still has a long way to go...".
While Powell acknowledged that food and energy can be volatile, he focused on core inflation (non-food and non-energy) which has remained incredibly difficult, falling from a peak of more than 5% to an all-time high of 4.1%. Commodity inflation dropped sharply, due to the rise in interest rates, while prices in the housing sector began to decline recently, despite the lack of inventories.
However, among services (including health care, food and transport), which make up half of the core personal consumption expenditure index, I admit that "twelve-month inflation in this sector has moved sideways since take off". And while there have been some encouraging developments in this category in recent months, by being relatively immune to interest rate changes and supply chain disruptions, as well as benefiting from a still tight labor market, services inflation remains high.
Powell insisted that the latest data should be taken with caution, and that price stabilization is still out of reach.
Christine Lagarde, the president of the European Central Bank, emphasized that the increase in protectionism, the reorganization of trade ties, and the effects of climate change (and related decarbonization efforts) could lead to an intensification of supply shocks in the future.
The macro-economic transformations that Lagarde focused on included the profound changes in the labor market given the after-effects of the pandemic, the rapid digitization of the workplace, the age of remote work and the growth led by artificial intelligence that will support some jobs and threaten others; and the shift in energy along with OPEC+'s weak performance of its targets and the uncertainty in the supply mix in the future; And the "deep geopolitical gap" due to resettlement and support of friends and fragmentation into competing blocs, and the consequent redesign of supply chains.
The European Central Bank's discussion concludes that geopolitical fragmentation may lead to a decrease in real imports by up to 30% worldwide. In addition, it expects a significant increase in investments during this decade, including an average of 600 billion euros per year on the energy transition in the European Union; NATO related expenses; and accelerating digital transformation across multiple sectors as countries look to boost their own productivity factors.
Technical analysis of the euro against the dollar:
- The shape of the price of the euro currency pair against the US dollar EUR/USD associated with the downward trend line has remained constant since mid-August.
- The price tests this resistance zone, which corresponds to the 61.8% Fibonacci retracement level.
- The technical indicators point to the continuation of the downward trend.
- The 100 SMA is below the 200 SMA to indicate that the overall trend is still bearish.
The moving averages are also close to the trend line to add to its strength as a ceiling. If the bullish barriers are able to keep the gains under control, EUR/USD may resume its decline to its lows of 1.0763 or below. On the other hand, a break above the dynamic inflection point of the 200 SMA could mean that a reversal is imminent.
Stochastic is already trending down from the overbought zone to indicate that sellers are controlling the market while buyers are taking a break. Likewise, the RSI is pointing down to indicate that downward momentum is picking up. The euro will be affected against the dollar today by the announcement of the inflation reading for the euro area and then the announcement of the ADP reading to measure the change in American non-agricultural jobs and then the reading of the growth of the American gross domestic product.
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