EUR/USD likely leads another dollar decline
Traders should expect a softer dollar and stronger EUR after Jackson Hole. Fed events this year have mostly been preceded by speculation about rate rises and followed by markets pricing out future Fed tightening. The amount of hikes priced by Fed funds over the next two years fell to a new low this week, suggesting the pattern is repeated today. Even if the Fed chair were to signal the possibility of another hike this year, huge yield advantages still favour many emerging market currencies. If she does not the dollar will go down broadly and is likely to underperform versus EUR. Draghi may try to dampen expectations for a taper but won't kill off the idea. Both the IFO, which is close to its 26 year peak, and solid eurozone PMI data support a stronger EUR. The key is that EUR/USD has consolidated huge gains near trend highs irrespective of large spec longs. If Draghi fails to quash hawks EUR/USD may fly.