FX.co ★ GBP/USD: Headliner of the day - Jerome Powell

The Jackson Hole Symposium is in full swing. Today, everyone is waiting for the speech of the head of the Federal Reserve. The further dynamics of dollar currency pairs, including the GBP/USD, depends on Fed Chairman Jerome Powell's comments

The dollar is preparing to take off

This week's highlight is the Fed Economic Forum at Jackson Hole. It should culminate in Powell's speech today.

Markets are hoping that the head of the Fed will shed light on the central bank's future plans for interest rates.

Signs of easing inflationary pressures in the US this month have sparked speculation that monetary tightening might slow down.

However, a series of hawkish comments by Fed members last week and this week have left markets believing that the Fed will not loosen its grip on rising prices.

Inflation in America is still at record highs. The annual rate was 8.5% in August, well above the Fed's target of 2%.

Ahead of today's event, Fed fund futures traders estimate a 61% likelihood of a 75 bps rate hike in September.

Expectations of a more hawkish tone from Powell provide significant support to the dollar. Over the week, the US currency index rose by 0.38%, and since the beginning of August its growth has amounted to 2.5%.

One of the currencies that shows the worst dynamics in relation to the greenback continues to be the British pound.

Due to the large difference in interest rates between the Bank of England and the Fed, the pound has fallen against the dollar by about 12% this year and risks falling even lower in the foreseeable future.

If Powell signals a third consecutive 75 bps rate hike at Jackson Hole, the GBP/USD pair could head for another steep plunge.

Recall that earlier this week, the pound hit its lowest level against the dollar since March 2020. The rate collapsed on the back of a decline in the PMI index for the manufacturing sector in the UK.

This morning, the pound is still trading near a 2.5-year low, despite its strong rise the day before. The GBP/USD jumped 0.5% on Thursday to hit 1.1844.

According to many analysts, yesterday's growth of the asset is nothing more than just a technical reset. In other words, we saw temporary relief as part of a long-term weakening trend.

What will happen to the pound?

Most forecasts for the pound are now negative. Experts believe that the GBP/USD pair will almost never react to the comments of the governor of the British central bank, which will be made during the forum.

For now, money markets are expecting the BoE to be more likely to raise rates by 50bps next month. At the same time, the scenario, which includes a possible increase by 75 bps, is almost not considered.

And yet, let's assume that a hawk suddenly wakes up in BoE Governor Andrew Bailey, especially since there are weighty prerequisites for this.

Today, the British energy regulator is due to announce an increase in energy prices. According to forecasts, the cost will increase by 80% in autumn, which will further accelerate the already record high inflation in the country.

To reduce inflationary pressure, hypothetically, the BoE could surprise everyone and go for a sharp increase in rates in September. However, we should not forget how this could turn out for the British economy, which is already on the verge of a recession.

Growing fears of an economic slowdown are likely to outweigh the BoE's combative resolve on inflation. Therefore, analysts do not expect any miracles on the GBP/USD chart in the near future.

The only scenario in which the pound can rise sharply against the dollar is the unexpected change of tone of the head of the Fed.

If the Jackson Hole headliner throws a dovish surprise today, the dollar will weaken on all fronts, including against the pound. But do you yourself believe in such an outcome?