GBP/USD bears jump on Fed's switch to hawkish on inflation risks, target 1.3980

The bears are beating down the bulls as the US Federal Reserve turns more hawkish as they monitor inflation risks that could turn out to be higher and more persistent than they had expected. 

At the time of writing, GBP/USD is trading at 1.4012, just off its lows of 1.4011 after falling on the day from a high of 1.4132. 

The has pound dropped around 0.66% vs the US dollar since the Fed's announcements. 

Key notes on the Fed and Powell, so far

• Benchmark interest rate unchanged; target range stands at 0.00% - 0.25%.
• The interest rate on excess reserves raised to 0.15% from 0.10%
• The median projection shows two hikes in 2023, which suggests FOMC has overall shifted more hawkish. 
• US Fed funds futures price in a full rate hike by April 2023.
• Powell speech: We are on path to very strong labor market
• Powell speech: Substantial further progress still a ways off
• Powell speech: Conditions for liftoff forecast to be met sooner than previously thought
• Powell speech: Prepared to adjust policy if inflation expectation moved too high
• Powell speech: Would expect strong job creation in summer, going into fall
• Powell stands back on inflation will move down and is temporary. 

Overall, this is seen as positive for the greenback and sets up an August Jackson Hole taper announcement.

However, there is an air of caution around bullish on the greenback. 

While the statement took a more upbeat tone on the recovery in real activity but, despite the massive surge over the past couple of months, there has still been no more detail on the inflation outlook beyond the previously used line ''it is largely transitory''.

More importantly for forex traders, however, this is excellent news for forex volatility that has otherwise been at the lowest levels in over a year:

There is something for both the bears and the bulls which should give rise to some shifts in the FX space that have otherwise been range-bound.

That being said, trend traders will want to see key technical weekly structures broken. 

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But, there is a caveat

Jerome Powell has, to some degree, talked down the hawkish reaction so far. 

For instance, Powell says, short term prices, such as gasoline prices, are not a good forecast for future and longer-term expectations.  

Powell said the dots are ''not a great forecaster''.

• Powell speech: Discussing lift off now would be highly premature

This could give rise to a significant correction in the greenback over the coming sessions and throw the cable bulls a lifeline from support: