Federal Reserve Chair Jerome Powell's speech at the Jackson Hole Symposium had the FX markets on the edge of their seats, particularly given the preceding month-to-date rally of the U.S. dollar (USD). Although Powell's remarks were more balanced than the market's expectations of a hawkish tone, the speech's impact has potential implications for the currency market.

Key Takeaways:

1. Initial USD Reaction:

   The USD experienced an initial knee-jerk drop as Powell's balanced speech deviated from market expectations. However, the currency rebounded by the end of the speech, hinting at deeper market dynamics at play.

2. Implications for September and Beyond:

   We highlighted in our earlier report that a market expectation converging to a near-term Fed rate hold for September would likely alleviate some market pressure. Consequently, this could lead to a short-term pullback in the USD, potentially towards its 200-day simple moving average (SMA).

3. Year-End Projections for EUR/USD:

   Despite the short-term oscillations, we maintain a cautious view on the currency markets and continue to project the EUR/USD to reach 1.05 by year-end.

Conclusion:

While Chair Powell's balanced tone caused some initial fluctuation in the USD, the underlying fundamentals indicate a potential pullback towards the 200-day SMA in the near term. The longer-term outlook remains cautious, particularly given the uncertainties surrounding Federal Reserve policies. As such, a cautious stance should be adopted for the EUR/USD as we approach the end of the year, with an eye on the upcoming Federal Reserve decisions that could sway the currency markets.