The pound sterling strengthens against the US dollar thanks to Powell’s dovish statements on interest rates. Federal Reserve Chairman Jerome Powell has struck an unprecedentedly “dovish” tone in his remarks, stressing that the time has come to cut interest rates and that the bank will do everything it can to protect jobs. These remarks signal a marked shift from focusing on inflation to addressing economic weakness, opening the door to a rate cut. This raises questions in the markets about whether the Fed will decide to raise interest rates by 50 basis points in September or start with a 25-basis point increase.
As the chances of a strong 50-basis point hike have increased, the US dollar has retreated and the pound has risen to a two-year high of $1.3223. This rise indicates a technical uptrend, and it seems that the clearest path forward in the coming weeks is to the upside.
However, the negative signs on the charts have increased, with the RSI reaching 76, a very high level, increasing the possibility of a correction next week. The absence of major UK economic data over the next five days could leave the pound vulnerable to significant volatility based on global market movements.
Under these circumstances, it is hard to avoid optimism after the Fed gave the green light to cut interest rates, with Powell confirming the possibility of a 50bp cut in September. We may see some sterling weakness in the coming days, but this is unlikely to stop the strong uptrend.
Watch for the dollar to retreat if this week’s data beats expectations and casts doubt on the possibility of a 50bp rate hike. The big event on Friday will be the release of the PCE inflation index, which measures the impact of inflation on consumers.
Pound sterling reaches its highest level in two years amid anticipation of the Fed’s decisions
The pound rose to a two-year high at the end of last week, supported by the Federal Reserve’s commitment to cut interest rates in September. However, this rise may be a bit overdone.
In his latest remarks, Jerome Powell indicated that there is concern about the downside risks to the US labor market, and while he confirmed the central bank’s intention to adjust monetary policy, he refrained from specifying a specific path for cutting interest rates. Powell stressed in his speech at the Jackson Hole Symposium on Friday that “the direction of travel is clear,” but the timing and pace of the cut will depend on future data and evolving expectations.
The British pound (GBP) is trading near a two-and-a-half-year high, approaching 1.3200 against the US dollar (USD) during the North American session on Monday. The GBP/USD pair appears to be aiming to extend its seven-day winning streak, amid the US dollar’s weakness after Powell’s comments confirming a September rate cut.
Meanwhile, the US dollar index (DXY), which measures the value of the dollar against six major currencies, is hovering near its lowest level this year at 100.53. Powell explained that the central bank has become more concerned about the deterioration in the labor market, while he expects price pressures to return to the target of 2%. He added that inflationary risks have receded while risks related to the labor market have increased, stressing that “the bank will seek to support the strong labor market while making progress toward price stability.” This week, investors await the US core personal consumption expenditures price index data for July, which will be released on Friday. Personal consumption expenditure inflation is expected to see a steady growth of 0.2% on a monthly basis.
Durable Goods Orders Boost US Economy, GBP Keeps Eyes on Interest Rates
The US Census Bureau reported strong data for July on durable goods orders, with new orders growing at a notable 9.9%, beating expectations for a 4% increase. This strong increase in durable goods orders, a leading indicator of core consumer inflation, reflects the strength of the US economy and its resilience in the face of economic challenges.
On the other hand, the British market has seen little significant development recently due to a bank holiday in the UK, which led to a lack of new economic data. However, the pound is outperforming its major peers at the start of the week, with the strong performance of the British currency supporting the current moves by the Bank of England. In his speech at the Jackson Hole Symposium on Friday, Bank of England Governor Andrew Bailey indicated that the effects of inflationary pressures may be less than expected, but stressed that the central bank should be cautious in cutting interest rates. Bailey added that the Bank of England “will be cautious about cutting interest rates too quickly or too sharply.” Powell explained that the central bank has become more concerned about the deterioration in the labor market. Bailey also dismissed the risk of a potential recession, noting that the ongoing economic contraction in the UK is consistent with the goal of achieving a soft landing for the economy.
This week, the pound will focus on market speculation about the possibility of a Bank of England interest rate cut, amid the absence of major economic data. Markets are expecting another rate cut from the bank this year, although a series of upbeat economic data, including the preliminary S&P Global/CIPS Purchasing Managers’ Index for August, may affect expectations of a rate cut in September.
