GBPUSD
The GBPUSD pair, just like other USD pairs, played a waiting game so far this week. Market participants do not want to take any chance ahead of the much-awaited introductory speech by Fed’s Powell later today, at the start of the Jackson Hole Symposium. As such, the pair just hovered above 1.30, lacking direction, in what seems to be a generalized USD move.
The focus at the Jackson Hole meeting is on the Fed’s message. It seems that the market already priced in the fact that the Fed prepares to signal a transition from concrete inflation targeting to average inflation targeting, albeit no one knows the commitment and if there is going to be a threshold or not.
For market participants, and for the USD in particular, a move towards average inflation targeting has two implications. One is that the Fed will increase the pace of its large-scale asset purchases, a.k.a. quantitative easing. If that is the case, the balance sheet will increase at an even faster pace than it already had.
Another is that the yields on the long-end of the curve will be crushed even more in the period ahead. Also, the Fed will let inflation run well above the 2% mark.
Both outcomes are bearish for the USD. Hence, the USD traded with a dovish tone all week, sellers emerging on every bounce. In the meantime, the stock market kept making new highs, with the Nasdaq100 being 30% higher YTD.
As long as the GBPUSD price action holds inside the rising channel, it will find bids on every dip. However, cracking signs on the bullish side start to emerge, especially considering the fact that it looks like a rising wedge.
The risk is that the market will be disappointed by the Fed’s message, and the USD will bounce from its uber-bearish trend seen all summer. If that is the case, GBPUSD trades lower and bears may consider an entry on the short side at 1.3125 with a stop-loss at 1.3250 and targeting a risk-reward ratio of 1:2.
