- GBP / USD is holding in bullish chart territory, but Brexit concerns and strong positioning leave the pound vulnerable.
- The Jackson Hole confirms a new era for the US dollar as this low interest rate cycle removes its carry advantage.
GBP / USD is currently trading at 1.3195 between a range of 1.3161 and 1.3284, almost flat the day following a hectic morning in US session.
The focus for the pound for the rest of this week will be with Bank of England Governor Andrew Bailey speaking on Friday where negative interest rates could be a topic of discussion.
However, the backbone of the markets this week remained with the Federal Reserve and today’s highly anticipated speech by Fed Chairman Jerome Powell.
Essentially, Powell confirmed what the Fed wired, which could lead to a paradigm shift in how the market will perceive the value of the US dollar.
In reality, however, the event turned out to be a “done deal” for markets that had already been valued in possible confirmations in a speech by Powell.
The US dollar is back to square one following the mad rush in the DXY between 92.42 and 93.32 in and around the event.
It should be remembered that the market is already far below the dollar, the most since 2018, but the Fed’s new approach officially removes the appeal of the dollar carry trade.
So what are the implications of the Jackson Hole?
The Fed chairman announced that Fed officials are officially adopting average inflation targeting (ACI) via an updated and unanimously approved statement on long-term goals and monetary policy strategy.
This essentially means that the Fed, having missed the 2% target for so many years, now wants to offset that and allow inflation to go above 2% to offset the deficit.
The question that remains now for the markets is how much higher inflation will be allowed to run, 2.5% PCE? This will be something to watch in the forecast in the September FOMC statement.
As such, the market reaction has been volatile given the disappointment that the Fed failed to mention new easing policies, or give more solid clues about easing forecasts or QE.
Overall, however, this is a policy change that removes the long-standing dollar interest yield disadvantage it has enjoyed for many years.
This gives rise to the potential for a reversal in the forex market, but in the short term it is probably only preferred for currencies that have not benefited as much from the dollar market exodus into positioning.
Currencies such as the pound are already heavily stressed in terms of positioning and the upcoming winter and Brexit negotiations, coupled with negative interest rate prospects, are creating a precarious landscape for bullish cable bets.
Negative rates are “part of our toolkit… but at the moment we don’t plan to use them” according to BoE Governor Andrew Bailey.
However, while recent economic data indicates that the UK’s economic recovery accelerated in the third quarter, markets are well aware that while economic conditions deteriorate significantly, negative rates pose a real threat to the economy. arsenal of the old lady.
A deal without Brexit would hit the economy hard.