EUR/USD weakened on Wednesday, ignoring interest rate and options trends that would typically be bullish, in a clear sign that the market needs a dovish Jackson Hole surprise from the Fed to invigorate longs.
The tightening trend in German-U.S.
2-year yield spreads US2DE2=RR -- now at their narrowest since July 5 -- has been eroding the dollar's yield advantage but failing to lift EUR/USD.
Similarly, EUR/USD risk reversals EUR1MRR=FN indicate options investors are less wary of EUR/USD downside -- with vol premiums for puts over calls shrinking since August 18-19 -- but unable to stall EUR/USD's slide.
The buildup to Fed Chair Powell's Jackson Hole speech appears to have overshadowed other market influences, with investors expecting a hawkish tone even though recent U.S. data indicates inflation may be moderating and growth slowing.
That could give EUR/USD longs reason to hope for Powell to indicate a less hawkish policy stance, potentially weighing on U.S. rates EDZ2 and the dollar.
However, if markets interpret Powell as surprisingly hawkish, EUR/USD should extend its down trend, potentially breaking the December 2022 low and leading shorts to target key support near 0.9600.
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