EUR/USD: A decisive week due to the Jackson Hole meeting

The euro enters the new week in a favourable position against the dollar, having gained nearly 1% last week and reclaimed the $1.17 level. This move stems less from a fundamental shift favoring the Eurozone than from a weakening of the greenback, amidst an environment marked by tensions over US debt, questions regarding Federal Reserve policy, and a particularly busy week for macroeconomic data.

Yet, the US economy continues to show resilience. Recent PMI indices confirmed solid activity in August. The composite PMI stood at 55 - its highest level in over four years - driven notably by the services sector at 56.9. The manufacturing sector also remains in expansion, with an index reading of 53.1. These figures point to a still-robust US economy, complicating the Fed's task of sustainably bringing inflation back to its target without triggering an excessive economic slowdown.

Interest rates therefore remain central to the EUR/USD outlook. US yields are holding at particularly high levels, with the 10-year rate around 4.6% and the 30-year rate above 5.25%. Typically, rising US yields support the dollar by making assets denominated in the currency more attractive. However, the current trend is more ambiguous: part of the rate increase now reflects concerns regarding inflation, public deficits, and the trajectory of US debt.

It is precisely this dynamic that is weighing on the greenback. Federal debt has surpassed $40 trillion, while the deficit remains above 6% of GDP and the interest burden grows increasingly heavy. The US Treasury's intervention last week - stepping up its long-term bond buyback program - offered only temporary relief to the bond market. Yields quickly resumed their upward trend, yet without triggering a genuine rebound in the dollar. The market thus appears to view a rate hike driven by rising fiscal risk differently from one resulting simply from a more dynamic economy; the former does not carry the same positive implications for the currency.

Naturally, the Fed will take center stage this week. Investors now put the probability of another rate hike in September at around 40%. This expectation could shift significantly given the wealth of data due in the coming days. Wednesday will be the busiest day on the US agenda, featuring the release of PCE inflation - the Fed's preferred measure - as well as data on household income and spending, durable goods orders, and the second estimate of second-quarter GDP.

The highlight will come on Friday with Kevin Warsh's speech at Jackson Hole. Investors will be looking to see whether the Fed Chair confirms the need to maintain a restrictive monetary policy - or even raise rates again - or if he adopts a more cautious stance in light of tensions in the bond market. In a market already highly sensitive to monetary policy expectations, even a slight shift in tone could trigger significant moves in US yields and, consequently, the dollar.

The economic situation in the Eurozone is also improving. Recent PMI figures delivered a pleasant surprise, with the composite index rising to 52 in August - its highest level since November. This momentum is driven primarily by the manufacturing sector, which saw its strongest activity growth in years, alongside a recovery in new orders and a return to growth for exports. The Eurozone is thus demonstrating greater-than-expected resilience in the face of rising energy prices and geopolitical tensions.

This improvement also narrows the ECB's room for maneuver. Markets continue to anticipate at least one more rate hike before the end of the year and assign a high probability to a move as early as the 10 September meeting. As long as economic activity holds up and inflationary pressures persist - driven notably by high energy prices - the ECB retains grounds for maintaining a restrictive monetary policy.

The monetary policy divergence between the United States and the Eurozone therefore remains a key factor for the EUR/USD exchange rate. Until now, significantly higher US yields should theoretically have provided greater support for the dollar. However, concerns regarding US fiscal policy are gradually altering this dynamic.