EUR/USD Analysis – August 28: Kevin Warsh Reaffirms the Fed's Focus on Inflation

The wave count on the four-hour chart for EUR/USD is becoming more complex. There is still no question of canceling the bullish trend segment (bottom chart) that began in January last year. On the contrary, we have seen a complete A-B-C corrective structure, which is most likely finished. We never saw a convincing wave 5 within C. This wave took a truncated form, which also occurs from time to time. I would like to remind you that classical wave structures are generally found only in textbooks. In real-world trading, traders and analysts should be more flexible in their analysis. Therefore, I have been saying in my reviews for a month now that we should prepare for a rise in the European currency. If the current wave count is correct, the instrument is at the very beginning of a new bullish trend segment.

On the lower timeframe, I can identify a classic five-wave bearish structure with a truncated wave 5. I had expected the European currency to fall to the 13th level, but the news background turned against the dollar, and the sellers simply did not have enough strength to form a convincing wave 5. Therefore, we can consider July 28 to have marked the beginning of a new bullish wave sequence.

The EUR/USD pair fell by 50 points on Friday. A further decline may follow before the end of the day. However, at this point, we can confidently say that the market reaction was not strong. I would like to remind you that a few hours ago, the United States released the annual Nonfarm Payrolls report, and Fed Chair Kevin Warsh delivered a speech at the Jackson Hole symposium. Naturally, market participants expected significant market movements. However, as it turned out, the reality was neither terrible nor particularly positive. The total number of jobs was revised downward by only 79,000, which is not particularly significant. And Kevin Warsh did not provide the markets with anything fundamentally new. Of course, traders could not simply ignore these two events, but I repeat: the reaction was weak and even largely formal.

The FOMC Chair stated that core inflation is moving toward its target at a sufficient pace, but he did not specify what period he considered sufficient. If the disinflation process slows or stops, the Fed will "have a lot of work to do." Mr. Warsh acknowledged that core inflation may fail to reach the target in a timely manner, but again, he did not explain what "timely" means or how long that period would be. Therefore, the market was once again left to draw its own conclusions. In simple terms, Kevin Warsh made comments about inflation that effectively told the market: "Think for yourselves and make your own decisions." The market interpreted his remarks to mean that since inflation is slowing at a "sufficient pace" but may fail to reach the target on time, some monetary policy tightening may be possible. However, when and under what circumstances this could happen remains unknown. In my view, it will not happen in September. Interestingly, according to the CME FedWatch Tool, futures markets are now pricing in a 57% probability of a policy tightening in September, compared with 33% this morning.

Based on my EUR/USD analysis, I conclude that the pair remains within the bullish trend segment (bottom chart) and, over the shorter term, has moved into a new bullish wave sequence. In my view, this is an excellent time to build long positions. Unless the bearish trend segment that began on January 28 develops into a more extended five-wave structure (which would require a strong news background in favor of the dollar), EUR/USD is at the very beginning of a new, prolonged bullish trend segment, with targets extending as high as the 25th figure.

On the higher timeframe, a bullish trend segment can be seen, followed by the development of a corrective wave sequence. The A-B-C structure is presumed to be complete. If this is the case, a new impulsive bullish trend segment has begun.