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US Dollar Outlook: GBPUSD, USDJPY Price Action on Fed's Powell

US Dollar Outlook: GBPUSD, USDJPY Price Action on Fed's Powell

Justin McQueen, Analyst

USDPrice Analysis and Talking Points:

  • GBPUSD | Short Squeeze and Thin Liquidity
  • USDJPY | Risks Remain Tilted to the Downside on Potential Dovish Disappointment

See our quarterly USD forecast to learn what will drive prices throughout Q3!

Jackson Hole | Fed Chair Powell Set to Speak at 1500BST

So far, the rhetoric from Fed officials have tilted slightly on the hawkish side, relative to market expectations. Yesterday, Fed’s George stated that she would be happy to leave rates where they currently are, while Harker noted that the Fed are roughly at neutral. Alongside this, Fed’s Kaplan said he would like to avoid taking further action on interest rates. As such, given that money markets are pricing in 53bps worth of easing by the end of the year and an additional 47bps by the end of 2020, the bar has been set high for Fed Chair Powell to meet those dovish expectations, particularly given the comments that have come from Fed officials already. Therefore, risks are for a slight uptick in the US Dollar, while equity markets could come under pressure as Powell sticks to the status quo that the Fed will act as appropriate to continue the economic expansion.

US Dollar Outlook: GBPUSD, USDJPY Price Action on Fed's Powell

GBPUSD | Short Squeeze and Thin Liquidity

While talks between PM Johnson and Merkel, as well as Macron appear to have been somewhat constructive, The recent price action in GBP following comments from Merkel that there can be a solution to the backstop, emphasises the fact that market liquidity is thin and that markets are very short the Pound (keep in mind that the weekly COT report shows GBP shorts at extremes) as opposed to a notable Brexit breakthrough.

That said, the alternative arrangement commission may have found a plausible solution to the Irish border issue (alternative solution). However, the question remains as to whether the EU will budge on the legally-binding wording of the backstop or Boris Johnson scaling back demands to scrap the backstop. Challenges remain for the Pound, with market participants back to Brexit headline watching, implied volatility is rising, particularly in the 1-month tenor as Merkel places the onus on for Boris Johnson to find a solution in 30 days.

US Dollar Outlook: GBPUSD, USDJPY Price Action on Fed's Powell

GBP PRICE CHART: Daily Time Frame (Mar19Aug 19)

US Dollar Outlook: GBPUSD, USDJPY Price Action on Fed's Powell

USDJPY | Risks Remain Tilted to the Downside on Potential Dovish Disappointment

Risks continue to remain tilted to the downside for USDJPY with pair failing to make a move above the 107.00 handle. Expectations of a potential dovish disappointment could see equity markets come under pressure, thus keep the JPY relatively firm against the greenback. On the downside, notable support is situated at the 105.00 with eyes on a continued deterioration of the economic outlook in order to weigh on USDJPY.

USDJPY PRICE CHART: Daily Time Frame (Jul 18 – Jul 19)

US Dollar Outlook: GBPUSD, USDJPY Price Action on Fed's Powell

FX TRADING RESOURCES:

--- Written by Justin McQueen, Market Analyst

To contact Justin, email him at Justin.mcqueen@ig.com

Follow Justin on Twitter @JMcQueenFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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