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EURUSD forecast for 28.08.2020

August 28, 2020

August 28, 2020

EUR/USD forecast: Fed threw a party for the euroDmitri Demidenko

Fundamental Euro forecast for today

A change in the Fed’s policy opens up new opportunities for the

EUR/USD bulls

People with strong spirits admit and correct their mistakes. The Fed is embarking on the most dramatic shift in monetary policy since 2012 when it set a 2% target on the Personal Consumption Expenditure (PCE) index. The central bank announced its willingness to tolerate inflation above this level, which means it abandoned the practice of preemptive increases in the federal funds rate in case there are signs of severe inflationary pressure. In fact, the Fed admitted its own mistake. If such an approach had been used before, then monetary policy tightening would have begun not in 2015, but 2018.

During the virtual conference in Jackson Hole, Jerome Powell noted that the central bank’s policy could not remain unchanged in a “new normal” environment. The Fed should adapt its monetary policy to “the new challenges that arise.” Low interest rates are needed for an economy that is recovering after a recession. As for inflation, the central bank’s acceptance of its higher values than 2% has its limits. According to Powell, in case the inflation exceeds the 2% target, it will be moderate and will not continue for a long time.

Dynamics of US inflation

![LiteForex: EURUSD forecast for 28.08.2020][1]

Source : Wall Street Journal

The shift to the average PCE targeting is a bearish factor for the US dollar. Earlier, if the US domestic data showed a positive change, investors expected the inflation rise. The talks about the start of the monetary normalization cycle were the reason for the USD long-term uptrend in 2014. Now, the greenback has lost its primary benefit. Besides, the Fed seems to limit itself in managing future recessions.

Although Jerome Powell sounded dovish, the [EUR/USD][2] rode a roller coaster. It touched the support at 1.177-1.178, and then, tried to consolidate above the resistance at 1.188 but failed. According to Federated Hermes, such a wild market reaction results from the fact that the Fed didn’t announce a boost in the QE pace to accelerate inflation. Jefferies believes that a shift to the average PCE targeting without a clear plan is just words ion the paper, which means nothing.

I personally believe that the bond market has once again worked out the principle “buy on rumor, sell on facts”. Before the Jackson Hole meeting, the Treasury yield remained low. However, it surged after Powell’s speech, saving the greenback form a crash.

What’s next? The Fed has set the greenback back, which increases the chance that the [EUR/USD][2] will continue rallying up after it breaks through the local high at 1.191. Nonetheless, the Fed is an example to follow among the world’s leading central banks, so, other regulators can do the same. The ECB also could set a higher inflation target. For example, the Bank of France Governor Francois Villeroy de Galhau said that it was essential to have an inflation target over the medium term, reacting to a major revision of the Fed’s monetary policy. Furthermore, Germany introduced new restrictions because of the increase in the number of COVID-19 cases. So, not everything is so simple with the euro’s uptrend. The euro’s surge could be followed by a drawdown, just like a party is followed by a hangover.

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Price chart of EURUSD in real time mode

![EUR/USD forecast: Fed threw a party for the euro][5]

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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