EUR/USD has edged higher today and is trading at the parity line. It could be a volatile North American session, with Fed Chair Powell addressing the Jackson Hole central bank conference.

Germany posted another soft release today in what has been a miserable week. GfK Consumer Confidence for September slipped to -36.5, down from -30.9 and worse than the estimate of -31.8. The index has reeled off 10 straight declines, with the readings falling ever-deeper in negative territory. The sharp rise in energy prices have raised the risk of a recession in the eurozone’s largest economy, and this has sapped the confidence of the German consumer.

This week’s German releases paint a grim picture of the economy. Services and manufacturing PMIs both remained in contraction territory (below 50.0) for a second straight month. The labour market, which had been a bright spot in the economy, saw the pace of job creation fall to a 1.5-year low. GDP in Q2 rose a negligible 0.1% and German Ifo Business Confidence fell to 88.5, the index’s lowest level since mid-2020.

As the war in Ukraine drags on with no end in sight, the energy crisis could get significantly worse in the winter, as Western Europe is vulnerable to a cutoff of Russian oil and natural gas. German maufacturers are grappling with higher costs, a possible energy crunch and supply chain disruptions. Things could get very bad this winter, and this will put pressure on EUR/USD, as investors ponder whether to dump their euros and look for greener pastures to park their assets.

Fed Chair Powell’s speech at the Jackson Hole Symposium is the event of the week. If Powell repeats the well-worn message that the Fed plans to continue tightening aggressively until inflation is curbed, the dollar could gain ground. However, if the Fed Chair’s message is less hawkish than expected, we could see sharp gains in the equity markets at the expense of the dollar, as was the case following the surprise drop in US inflation earlier this month.

Overshadowed by Jackson Hole, the US releases some key data today ahead of Powell’s speech. We’ll get a look at US Personal Income, Personal Spending and the Fed’s preferred inflation gauge, The Core PCE Price Index. If these numbers are stronger than expected, it will drive home the point that the economy is resilient and able to absorb further rate hikes in the coming months, and the the US dollar could respond with gains in the North American session.

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