Pounds Sterling Bulls Vulnerable Despite FED’s Powell Dollar’s Paradigm Shift Report

Pounds Sterling Bulls Vulnerable Despite FED’s Powell Dollar’s Paradigm Shift Report

Currently, the GBP/USD pair is trading at 1.3195 in the 1.3161-1.3284 range, practically unchanged the day after a stormy morning in the American session. The focus of the pound until the end of this week will be a speech by the Governor of the Bank of England Andrew Bailey on Friday, where negative interest rates may become a topic of discussion.

However, the basis for the markets this week is the Federal Reserve and today’s long-awaited speech by Fed Chairman Jerome Powell. Essentially, Powell confirmed the Fed’s telegraphic messages that could lead to a paradigm shift in how the market will value the US dollar.

The US dollar was back on track after a sharp jump in the DXY between 92.42 and 93.32 during and around the event. It should be recalled that the market is already sorely lacking the dollar, the maximum since 2018, but the new approach of the Fed officially deprives the dollar of the attractiveness of the carry trade.
FED’s Powell Speech Implications?
The Fed chairman announced that Fed officials are formally adopting Average Inflation Targeting (AIT) in an updated and unanimously approved Statement of Long-term Monetary Objectives and Strategy.

In essence, this means that the Fed, which has failed to hit the 2% target for so many years, now wants to offset that and allow inflation to exceed 2% to fill the deficit. The question now remains for the markets: how much higher inflation will be allowed, 2.5% PCE? This will be something to look out for in future guidelines in the September FOMC statement.

Thus, the market reaction was volatile, given the disappointment that the Fed did not mention further policy easing and did not give stronger hints of softening forward-looking guidance or quantitative easing.

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