Tonight's Powell speech, is the Euro in danger?

The euro surged in August, rising to a one-year high against the US dollar on Wednesday, but Federal Reserve Chairman Powell's cautious remarks on Friday may reverse this trend. For a long time, the euro has been the simplest way for market participants to bet against the US economy as sellers can easily find buyers, and vice versa.

The daily trading volume of the euro against the US dollar is about $2.29 trillion, accounting for about one-third of the global foreign exchange trading volume.

Data from the Bank of New York Mellon shows that in the past two weeks, fund managers betting on the Fed entering a rate-cutting cycle have been buying euros every day. As the world's largest custodian bank, Bank of New York Mellon oversees assets of over $45 trillion.

Bank of New York Mellon believes investors are buying euros ahead of Jackson Hole.

Robot traders are also involved. Managers using computer algorithms to chase the latest market trends have sold $70 billion to $80 billion so far this month. According to UBS Group, the euro is one of the major beneficiaries.

All of this has driven the euro against the US dollar up by 3% since the beginning of the month, reaching a high of 1.1143 on Wednesday, the strongest since July last year. Revised US employment data supported bets on a Fed rate cut, providing additional momentum for the euro.

However, as central bank governors gather at Jackson Hole and with weak economic growth in Europe, many are concerned that the fate of the euro is about to turn. Strategists say Powell or his deputies only need to push back against market expectations of a rate cut. This would indicate that compared to Europe, where rate cuts have already begun, US rates will remain high, enhancing the attractiveness of the dollar.

Geoff Yu, senior strategist at Bank of New York Mellon, said the euro is "a major beneficiary of falling US rate expectations and improving risk appetite." "But this is not a completely bullish story for the euro, as the macro situation in Europe remains very weak." The rise of the euro may be more related to its superior liquidity than any fundamental change in the region's economic outlook.

Europe's Growth Dilemma

Stephen Jen, CEO of Eurizon SLJ Capital, said, "It's more about the dollar weakening than the euro strengthening, as the fundamentals of the euro have not changed much."

Signs of economic difficulties in various parts of the euro area are increasing, and confidence in Germany, the largest member of the euro area, has plummeted. ECB Governing Council member Olli Rehn said that the risks to economic growth have strengthened the case for the ECB to resume easing policies at next month's meeting.

Currently, the aggressive easing expectations in the US are overshadowing the economic weakness of the euro In the past six weeks, Aspect Capital Ltd's quantitative model has switched from shorting the Euro to going long on the Euro, with opportunities for the Euro to rise against the British Pound, Swiss Franc, and Norwegian Krone. Mount Lucas Management LLC expects the Euro to US Dollar exchange rate to continue rising, reaching 1.20.

Elias Haddad, Senior Market Strategist at Brown Brothers Harriman, stated that due to the Federal Reserve not being as dovish as the market had expected compared to the European Central Bank, the Euro is almost certain to reduce its gains.

Haddad said, "We still believe that differentiation persists, which should continue to support the US Dollar. The market is overly pessimistic about the US economy."