GBP/USD bulls vunerable despite Jackson Hole's confirmation of USD paradigm shift

GBP/USD is currently trading at 1.3195 between a range of 1.3161 and 1.3284, almost flat on the day following a turbulent morning in the US session.

The focus for the pound for the rest of this week will be with the Bank of England's governor, Andrew Bailey, speaking on Friday where negative interest rates could be a theme of discussion.

However, the bedrock for the markets this week stayed with the Federal Reserve and today's highly anticipated speech from the Fed's Chair, Jerome Powell. 

Essentially, Powell confirmed what the Fed has been telegraphing which could make for a paradigm shift for the way the market will view the US dollar's worth.

In actual reality, however, the event has resulted in a 'fait accompli' for markets which had already priced in the eventual confirmations in a speech made by Powell.

The US dollar is back to square one in the aftermath of the wild ride in the DXY between 92.42 and 93.32 in and around the event.

It should be recalled that the market is already very short of the dollar, the most since 2018, but the new approach from the Fed officially strips the dollar's carry trade allure.

So what are the Jackson Hole's implications?

The Fed chairman announced that Fed officials are formally adopting average inflation targeting (AIT) via an updated and unanimously approved Statement on Longer-Run Goals and Monetary Policy Strategy.  

What this essentially means is that the Fed, having failed to meet the 2% target for so many years, now wants to make up for that and to allow inflation to run above 2% to make up for the shortfall. 

The question now left for markets is how much higher inflation will be allowed to run, 2.5% PCE? This will be something to watch for in forward guidance in the September FOMC statement. 

As such, the reaction in the market was volatile considering there was a disappointment that the Fed did not mention any further easing policies, nor did they give stronger hints about easing on forward guidance or QE. 

However, overall, this is a policy shift which strips away the dollars long-standing interest yield disadvantage that it has enjoyed for some many years. 

This gives rise to the potential of a turning point on the FX market, but for the near term, it is likely most favourable only to currencies that have not enjoyed as much uptake of the market's exodus from the dollar in positioning. 

Currencies such as the pound are already highly stretched in terms of positioning and the forthcoming winter and Brexit negotiations, coupled with prospects of negative interest rates makes for a precarious landscape for bullish bets in cable. 

Negative rates are “part of our toolbox…but at the moment we don’t plan to use them” according to BoE Governor, Andrew Bailey.

However, while recent economic data does indicate the UK’s economic recovery has picked up momentum in the third quarter, the markets are well aware that should economic conditions deteriorate significantly, negative rates are a real threat in the Old Lady's armoury.

A no Brexit deal would hit the economy hard.

GBP/USD levels