EUR/USD: A Federal rate hike is on the horizon

The dollar regained some ground on Friday following remarks deemed "hawkish" (aggressive regarding monetary policy) at the Jackson Hole symposium - the major annual gathering of the world's top central bankers, held in the charming Wyoming valley of the same name.

The Fed chief deemed inflation in the US "concerning" and stated he could "hardly" describe current monetary policy as "restrictive." This leaves the Fed with room to further tighten policy should inflation fail to recede.

"A Federal Reserve that is more discreet and targeted in its communication is better able to achieve its objectives," states Kevin Warsh. The Fed chief's priority is to bring inflation back to the 2% target.

"We need to be sure that underlying inflation is moving closer to our target, clearly and at a sufficient pace. Otherwise, we have our work cut out for us. That is our job... our mandate... and the mission we must fulfill," he adds.

Without appearing overtly "hawkish," his comments inevitably raised the probability of a federal rate hike at the Fed's next policy meeting on 16 September. CME Group's FedWatch tool now puts the odds of a 25-basis-point rate hike at 61%.

"Kevin Warsh used the Jackson Hole symposium to establish his credibility as a champion of the fight against inflation, rather than positioning himself as a market-friendly communicator. The message was clear: the economy is robust, AI could boost long-term growth, but inflation remains the immediate priority for monetary policy," explains Christophe Boucher, Chief Investment Officer at ABN AMRO Investment Solutions. Thomas Hempell, Head of Macro & Market Research at Generali Investments, is currently banking on a Fed rate hike after the midterm elections, though Warsh's speech at Jackson Hole has clearly raised the risk of intervention as early as September.

"An ECB rate hike in September now seems a certainty. However, markets continue to anticipate an overly restrictive policy from the ECB thereafter; a further hike would require clearly identifiable second-round inflation effects, which we do not expect. Interest rate risks therefore appear contained in the short term but unresolved in the long term. Given strong corporate earnings and the resilience of the Eurozone (see chart), we maintain a slight risk-on stance, favoring credit over government bonds while keeping only a slight overweight position in equities due to high valuations, AI-related concentration, and weak seasonal trends in September. We favor slightly short duration, particularly in the US. The EUR/USD pair appears balanced in the short term but shows an upward trend towards year-end, driven by stretched positioning and diversification flows."

Forex traders will have noted that G20 finance ministers are meeting in the US through tomorrow with a packed agenda: the trade war, tensions with Ottawa, and the end of the truce between Washington and Tehran.

Today, Iran claimed to have attacked US military targets in Jordan and the UAE in response to US-led bombings - the first exchange of strikes in a month, undermining weeks of relative calm in the Middle East conflict.

Right now, the EUR/USD is trading at $1.15991.

KEY TECHNICAL FACTORS
The EUR/USD is currently testing the 200-day moving average (shown in brown) as it seeks to establish a trend. There is no clear technical signal at present to justify taking a position in either direction.

MEDIUM-TERM OUTLOOK
Based on the key technical factors mentioned, our outlook for the EUR/USD is neutral over the medium term.

We will maintain this neutral stance as long as the EUR/USD remains between the support level at $1.1470 and the resistance level at $1.1816.