Summary:

• EUR surges higher, USD tanks on Jackson Hole speeches
• Draghi stays upbeat but stops short of providing policy details
• EURUSD highest since the start to 2015, can it crush 1.20?

A famous Jackson Hole symposium resulted in big market moves once again. Even though speeches presented by Fed’s Yellen and ECB’s Draghi were far from conclusive, markets heard what they wanted to hear and just continued EURUSD rally taking the pair above 1.19, above this year’s highs and to the highest point since the first week of January 2015. Can this rally be sustained?

Let’s start with a speech from Janet Yellen which was first in line and provided an early impulse for the market. While the Fed’s policy no longer causes so much anxiety, investors still want to know what kind of balance sheet adjustment the Fed is going to choose and if Yellen considers a hike in December possible. However, there was nothing on those issues in the speech. Yellen talked financial stability and regulatory issues and objectively one could not say if her speech was dovish or hawkish. It wasn’t neither. Despite this the US dollar tanked – perhaps investors looked at least for some guidelines on balance sheet adjustments.

A speech from Mario Draghi was no less confusing for those awaiting the policy details. Draghi started from remarks that global recovery accelerated causing a wave of euphoria on the euro but it was all. He focused on structural issues and provided no guidelines regarding the September ECB meeting whatsoever.

Upward trend remains intact for the EURUSD. Source: xStation5 

So where next for the euro? Technically, the outlook looks very bullish. The pair avoided a deeper correction and a long term zone acted as a solid support, elevating EURUSD above 1.19.  

1.2050 is the next reference point for the EURUSD. Source: xStation5 

On the weekly chart we can see that there is no hard resistance in sight. The only reference point is a 1.2042 low from July 2012 (midst of the euro crisis). Then again the whole surge could look like a mirror image of a 2014 tumble.

Bond yields in Germany have declined despite increased expectations for the ECB. This could be a warning sign for the euro. Source: Bloomberg, XTB Research 

Fundamentally it’s all about ECB patience. Euro is overbought when we look at positioning but the bulls can keep coming for more until the Bank says it’s worried about the fx rate that could indeed complicate inflation adjustment in Europe. Do notice that a divergence between EURUSD and the bond market is becoming increasingly large so it’s a warning sign for the euro-bulls as well.