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GBP/USD Hits Two-Month Lows Amid Global Economic Problems and Fed Hawkishness

Leon Kramer

ByLeon Kramer

Aug 30, 2023

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  • The GBP/USD currency pair experienced a decline of 0.18% due to prevailing concerns surrounding global business activity and the challenges faced by China’s real estate market. These factors have contributed to a risk-off sentiment in the market.
  • The US Dollar Index (DXY) has experienced a 0.19% increase, reaching levels not seen in the past two months. This upward movement can be attributed to the remarks made by Powell during the Jackson Hole symposium, which conveyed a hawkish stance on inflation and the potential for rate hikes.
  • The current economic data in the United States, which includes Initial Jobless Claims that are lower than anticipated, introduces a level of intricacy to the projections regarding potential rate hikes. Consequently, traders are exercising caution in their approach.

The Pound Sterling (GBP) concluded the week with a decline against the US Dollar (USD), failing to maintain a position above the 1.2600 threshold. The GBP/USD pair experienced a downward trajectory, approaching levels not seen in the past two months. After the New York session, the currency pair is observed to be trading at 1.2576, reflecting a decrease of 0.18% from its previous value. Notably, the team reached its peak for the day at 1.2654.

Sterling Weakens as Investors Shy Away From Risk

The GBP/USD exchange rate experienced fluctuations due to multiple factors. The deceleration of global business activity, as evidenced by the S&P Global PMIs in the United Kingdom and the United States, has prompted a shift towards safer assets amidst a prevailing risk-averse sentiment, consequently exerting downward pressure on major markets.

In addition, the recent developments in China’s real estate market have raised concerns regarding a potential global economic downturn. These include Evergrande’s recent bankruptcy filing in New York and Country Garden’s removal from the Hong Kong Hang Seng index.

The Greenback (USD) experienced a notable advancement, as evidenced by the US Dollar Index (DXY). This metric gauges the performance of the US dollar against a selection of six currencies, including the Cable. The index recorded a 0.19% increase, concluding the week at 104.187, reaching levels not seen in the past two months.

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The United States (US) experienced a varied outcome in Durable Goods Orders, according to data from the US Bureau of Labor Statistics (BLS). Concurrently, the labor market continued to exhibit strength. The number of Initial Jobless Claims for the week ending August 19 experienced an increase of 230K, which fell below the anticipated figure of 239K.

This development validates the US Federal Reserve (Fed) to consider implementing further rate increases. The Chair of the Fed, Jerome Powell, emphasized this point during his speech at the Jackson Hole Symposium on Friday.

During the recent Jackson Hole symposium, Jerome Powell, Chair of the United States Federal Reserve, emphasized the central bank’s persistent apprehensions about elevated inflation levels. The individual expressed the possibility of future rate increases being deemed “appropriate” while emphasizing the continued reliance of the United States central bank on incoming data.

Powell acknowledged that while there has been a recent uptick in the pace of disinflation over the past few months, he emphasized the criticality of maintaining adherence to the Federal Reserve’s established 2% inflation objective. This underscores the notion that a substantial path lies ahead in achieving this target.

According to Powell, the current state of the economy, characterized by a strong and resilient expansion coupled with a labor market that is experiencing limitations, may lead to further measures to tighten economic conditions. If these favorable economic indicators fail to demonstrate any indications of decreasing, it is appropriate to consider implementing additional increases in interest rates.

In a recent statement, Patrick Harker of the Philadelphia Fed expressed the view that prevailing interest rates have reached a level that could impede economic activity. Harker further suggested that if inflation were to weaken, it might become imperative to implement further increases in interest rates.

In contrast, it is worth noting that Cleveland Federal Reserve President Loretta Mester has duly recognized the discernible upswing in the economy, substantiated by notable indicators such as GDP growth and labor market performance.

The individual underscored the importance of implementing a reduced growth rate to mitigate inflationary pressures while also drawing attention to the ongoing discourse surrounding the adequacy of current rates in effectively achieving the inflation target.

Price Analysis of the GBP/USD

The daily chart of GBP/USD indicates a neutral to downward bias, with the potential for further downside if the recent market structure swings low at 1.2590 is breached. In such a scenario, a 200-day Moving Average (DMA) test is possible at 1.2397. In the initial stage, it is imperative for sellers to strategically manipulate the exchange rate to a level that falls below the significant threshold of 1.2500.

A potential violation of the story above could result in the exposure of the 1.2400 entry, subsequently followed by the 200-day moving average. On the contrary, if buyers successfully reclaim the level of 1.2600, it may pave the way for a subsequent recovery towards the significant threshold of 1.2700.

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Leon Kramer

Leon Kramer

Leon Kramer, a renowned financial author, enlightens Main Forex News readers with his deep understanding of currency markets. His years in global finance, combined with an intuitive grasp of trends, delivers insightful, up-to-the-minute foreign exchange analysis.

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