Forming positions in the GBP/USD based on Jerome Powell's speech in Jackson Hole
Political uncertainty, sluggish growth of the economy of the Foggy Albion, and strong dollar lead the GBP/USD quotes to the area of the 14-month low, but in last third of August the situation began to change. Discontent of Donald Trump by the Fed's policy has taken the USD index bulls down a peg, and the optimism of Brexit's new secretary, Dominic Raab, allowed the pound to launch a counter-attack. According to the official, Britain is able to arrive at a deal with the EU before the European Union summit on October 18-19.
Over the past few weeks, the sterling has fallen into an abyss amid increased talk about the lack of agreement with Brussels and internal contradictions in the government. The supporters of the hard Brexit believed that Teresa May's plan was too soft, while advocates of the soft Brexit, on the contrary, considered it too hard. From the offices of EU representatives, rumors are circulating that before November the deal will not be concluded, which increases political uncertainty, contributes to the growth of volatility and exerts pressure on the positions of the GBP/USD bulls.
In my opinion, the fact that the sterling went up sharply amid the comments of Dominic Raab proves that the factor of the lack of agreement with the European Union is already priced in. Confidence in the implementation of this scenario has been growing lately, so the deviation from the plan, coupled with the comments of Donald Trump, caused the bears to take profits in the pair. In fact, it's not all so bad in the Foggy Albion as is commonly believed. The Confederation of British Industrialists notes that production volumes and orders grow faster than the long-term trend, the Ministry of Trade sets ambitious targets to increase the share of exports from 30% to 35% of GDP, regardless of the conditions for divorce from the EU, and London remains the largest financial center of the world. In April, the volume of trading on Forex here increased by 23% y / y to a record $ 2.7 trillion a day.
Dynamics of trading volumes on Forex in the largest foreign exchange centers of the world
In my opinion, the optimism of the new Brexit secretary is not enough to be enable us to talk about a ray of light between the clouds, as the clouds themselves look too gloomy. While political uncertainty continues to swirl over Britain, the initiative in the GBP/USD will belong to the US dollar. And here the key questions are: will the US economy and the process of the monetary policy normalization by the Fed begin to slow down? Will the Federal Reserve be on the sidelines of the US president or choose to be guided by fears due to trade wars, the fading of the effect of financial stimulus and overly aggressive monetary restriction?
Jerome Powell's speech in Jackson Hole might give a clue. The chairman of the Fed is supported by unemployment below 4%, accelerating inflation, + 4.1% GDP and historical highs for the S&P500. The speaker's confidence in the need to continue the normalization cycle will help the GBP/USD decline in the direction of 1.26-1.27, but his dovish rhetoric will increase the risk of the pair return above 1.3.
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Price chart of GBPUSD in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.