Warsh Revives Fed Hike Bets as NFP Takes Center Stage

EUR/USD pulls back toward the 100-day MA after rejection at 1.1700 resistance.

The dollar received a solid boost last week after Fed Chair Warsh’s speech at the Jackson Hole Symposium, where he suggested that inflation is too high. On Friday, the day of the speech, the dollar gained almost 100 pips against the euro as EUR/USD dropped from a high at 1.1658 to 1.1578, where it ended the week.

Earlier in the week, the Core PCE Price Index showed a 0.2% change, as expected, and only 0.1% above the previous reading. Although not alarming, it looks like this reading is not satisfactory for the Fed, and combined with the rest of the inflation data, it’s enough to increase the probability of a rate hike.

After the Fed Chair’s speech, the odds of a 25-bps rate hike increased, and at the time of writing, they sit at 57%, according to the CME FedWatch tool. A week ago, the probability was only 40%, so it looks like the speech produced a hefty odds change.

Economic Calendar Highlights

Early Tuesday, we will take a look at European inflation with the release of the Core CPI Flash Estimate, scheduled at 9:00 am GMT. The Eurozone CPI will be followed at 2:00 pm GMT by the US ISM Manufacturing PMI, which is a leading indicator of economic health with a medium-to-high impact on the market.

Wednesday’s key release will be the ADP Non-Farm Employment Change, scheduled at 12:15 pm GMT. The report tries to mimic the more important NFP that will be released two days later; however, its impact is much lower.

The US Services PMI is scheduled for release on Thursday at 2:00 pm GMT and will be followed on Friday at 12:30 pm GMT by the most important economic indicator of the week: the Non-Farm Payrolls (NFP) report. The NFP shows the change in the number of employed people during the previous month, excluding the farming industry. Together with the Average Hourly Earnings and the Unemployment Rate (released at the same time), the NFP paints a comprehensive picture of the US labor market and has a huge impact on all USD pairs.

Technical Outlook – EUR/USD

The price was rejected at 1.1700 resistance, which coincided with an overbought RSI on the Daily timeframe. However, the bulk of the move was generated by Kevin Warsh’s speech, and we can say it’s a classic case of fundamentals and technicals coming together to create a strong move.

The pair is now sitting on the 100-day MA (yellow line), and the move may extend towards the 50-day MA (blue line). Also, the long-term bearish trend line will possibly act as support if the dollar continues to strengthen. The level at 1.1600 is not decisively broken, so a move up is not totally out of the question.