US recap: EUR/USD holds off new lows before ECB, Fed events

Aug 24 (Reuters) – The dollar index hung onto small gains on Wednesday but surrendered most of its earlier advance after attempts to test 20-year highs at 109.27/29 met with rejection before the London close, with markets hesitant to push for a breakout ahead of Friday’s Jackson Hole central bankers symposium.

That rejection unraveled the broad dollar bid resulting from Minneapolis Fed President Neel Kashkari’s comments late on Tuesday, which supported more rate hikes to quash inflation and avoid the possibility of a more persistent strain of elevated price growth.

Markets have positioned for Fed Chair Jerome Powell to echo those sentiments in his Jackson Hole speech, though mixed and mediocre economic data — including Wednesday’s US durable goods and pending home sales — raise the risks of a more nuanced message that investors interpret as dovish.

EUR/USD encountered a strong bid at Wednesday’s 0.9910 low by Tuesday’s nearly 20-year trough at 0.99005 on EBS, but offers at parity squelched the spike higher, with the recent rebound in 2-year bund-Treasury yields spreads unsupportive in the face of soaring European energy prices and ECB hesitance to fight inflation more forcefully.

EUR/USD must break and close below 0.9900 to embark toward support by 0.9600.

Investors will scrutinize Thursday’s release of minutes from the ECB’s July 21 meeting, which resulted in a 50bp rate hike. Another 50bp hike is favored at the Sep. 8 meeting, but the terminal rate is currently priced in just below 2%, seemingly short of neutral or restrictive with euro zone inflation at 8.9%.

Sterling fell 0.35%, deriving no support from the 24.4bp surge in 2-year gilt yields to their highest since 2008 — up an incredible 139bp just since Aug. 2 — with UK inflation expected to peak at least three times as high as the 4.3% terminal policy rate markets are projecting next year.

The technical objective for sterling’s slide from its pandemic peak is right by the March 2020 pandemic nadir at 1.1413.

USD/JPY gained 0.2% on the back of higher Treasury yields, but it will need Powell’s hawkish help to have a go at its 24-year highs.

The dollar was broadly higher against high-beta currencies.

Reports that a Chinese regulator has warned banks against yuan selling had little immediate impact, as it was perceived as aimed at slowing, rather than reversing, USD/CNH gains.

German August Ifo readings and US jobless claims are also among Thursday’s events.

(Editing by Burton Frierson; Randolph Donney is a Reuters market analyst. The views expressed are his own.)