EUR/USD Forecast: Technicals imply an explosion of volatility, Powell to set the trend

Higher lows and lower highs – EUR/USD's current squeeze in a triangle means an explosion of volatility is coming, but in what direction? The most recent move has been to the downside as the market has soured. Safe-haven assets like the dollar are winning.

The same pattern has been repeating itself in recent days – Wall Street indexes hit record highs in the evening and then markets suffer a hangover in the morning. The chaotic scenes from Kabul's airport – where the West is scrambling to evacuate personnel from Taliban-controlled Afghanistan is weighing on sentiment. China's ongoing backlash against its powerful tech companies is also dampening the mood. The ongoing spread of the Delta coronavirus variant is unhelpful as well. 

The greenback has another reason to rise, and that is the perception that the Federal Reserve will taper down its bond-buying scheme sooner rather than later. Both the Wall Street Journal and CNBC reported that an announcement on printing fewer dollars could come as soon as the bank's September meeting. A hint could come as soon as next week's Jackson Hole gathering. 

Is inflation persistently too high or has it peaked? Have recent upbeat job gains consist of "substantial further progress"? That is the Fed's vague condition of cutting down purchases? Investors will not have to wait for next week to act, as Federal Reserve Chair Jerome Powell speaks already on Tuesday.

Even if Powell refrains from providing any hints in his speech, the current mood means that just dodging the topic could confirm markets' suspicion that tapering is coming. Moreover, it would be hard for the Fed Chair to fully skip any such remarks, as audience questions are planned. 

If Powell sticks to his stance that inflation is transitory and that the labor market has "a ways to go," the dollar would fall. If he either skips the topic or opens the door to a tapering announcement in September, the greenback could surge. 

Earlier, investors will be eyeing US Retail Sales statistics for July, which are set to be weaker than the fast increases in June – especially in the headline figure, which is set to drop by 0.2%. However, the US consumer has a tendency to defy skeptics.

See US Retail Sales Preview: Dollar booster? Low expectations, market mood point to a clear reaction

In the old continent, second-quarter Gross Domestic Growth was confirmed at 2%, as expected. Europe continues to have an advantage over the US when it comes to the Delta variant, but the main driver is the Fed.

EUR/USD Technical Analysis

Euro/dollar is trading in a narrowing wedge, or triangle. Technical analysis textbooks suggest that the narrowing ranges are set to make way for substantially stronger volatility. To what direction?

Momentum on the four-hour chart is to the upside and the currency pair trades above the 50 Simple Moving Aveage. However, it failed to break above the 100 and 200 SMAs. All in all, the picture is mixed. 

Support awaits at 1.1755, a swing high from last week, and it is followed by 1.1720 and 1.17.

Resistance is at 1.1805, which is Friday's high and where the 100 SMA hits the price. Further above, 1.1825 and 1.1860 are the next levels to watch.