Euro corrects on the global market, investors await Fed signals

On Tuesday, August 25, the euro is correcting on the global currency market FOREX after failing to hold above the 1.17 level. By 9 a.m., the EUR/USD pair is trading in the range of 1.1653-1.1656 dollars – slightly below yesterday's levels.

After strong growth in mid-August, the European currency has entered a consolidation phase near multi-month highs. The main reason for the current movement is the weakness of the U.S. dollar. Investors are increasingly concerned about the state of U.S. public finances and the prospects for growth of the U.S. national debt. An additional factor was the decision of the U.S. Treasury to increase the volumes of reverse repurchase of long-term Treasuries. However, this measure has not yet led to a sustained decline in U.S. bond yields.

The American currency simultaneously faces several problems. First, doubts remain about the sustainability of U.S. public finances. Second, the market continues to discuss the prospects for the Federal Reserve's interest rate policy. After weaker U.S. labor market data and relatively moderate inflation, investors have begun to count on the possibility of a softer Fed policy. This reduces the attractiveness of dollar assets.

The situation is ambiguous: strong economic statistics do not allow completely ruling out the preservation of high rates. Therefore, any new statement by Fed representatives could provoke a sharp movement in EUR/USD.

One of the main events for the currency market will be the speech by Fed Chairman Kevin Warsh at the Jackson Hole symposium. The market will look for signals in his speech regarding the future trajectory of American rates. It is here that a new strong impulse for the dollar or the euro may emerge.

If the Fed’s rhetoric turns out to be dovish, the dollar will get an additional reason to decline, and EUR/USD may consolidate above 1.1700 dollars.

If Warsh makes it clear that fighting inflation remains a priority and the room for rate cuts is limited, the dollar could recover part of its losses fairly quickly.