GBP/USD prints fresh 2020 highs as Fed pushes dollar lower

GBP/USD prints fresh 2020 highs as Fed pushes dollar lower
Written by:
Michael Harris
28th August, 15:26
  • Fed’s Powell sent the dollar lower after announcing plans to keep inflation at 2%, on average
  • GBP/USD price surged above the $1.33 handle for the first time in 2020 on dovish Fed
  • The pound will now want to push to $1.35 where the December 2019 high is located

GBP/USD price surged above the $1.33 handle for the first time in 2020 as the dovish message from the U.S. Federal Reserve sent the greenback lower.

Fundamental analysis: New inflation policy from the Fed 

The U.S. dollar plunged sharply on Friday against a basket of currencies, largely due to lower U.S. interest rates outlook, while the Japanese Yen climbed on news that Prime Minister Shinzo Abe will resign.

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The JPY managed to recover some ground after Abe, the longest-serving PM in Japan, resigned due to health issues. In the States, investors were focused on the message from the Fed’s Chair Jerome Powell, who spoke at the virtual Jackson Hole conference.

He said that the central bank plans to keep inflation at 2%, on average, which means that periods of very low inflation would lead to efforts by the central bank to bring the inflation above 2% for a certain period. 

As a result, the investors believe that this indicates the current ultra-low rates will stay at that level for some time, hence, hurting the dollar and helping stocks.

“It seems like a pretty subtle shift to most normal human beings,” said Janet L. Yellen, the former Fed Chair. But “most of the Fed’s history has revolved around keeping inflation under control. This really does reflect a decisive recognition that we’re in a very different environment.”

During the conference, the USD index (DXY) plummeted to 92.418 against a basket of currencies but quickly recuperated. However, it started falling again during the night, extending its losses in the early London session as the pound took advantage of the fundamentals. 

Technical analysis: New 2020 highs

The pound took advantage of the weak dollar, racing higher to gain over 1% and trade above the $1.33 handle for the first time since the beginning of the year. The former high of $1.3267 will now act as support.

GBP/USD price monthly chart (TradingView)

On the upside, the buyers will now aim for $1.35 where the December 2019 high sits. Looking more in the long-term, the 2018 highs above $1.43 remain a key target for the buyers.

Summary

The U.S. dollar fell sharply on the latest interest rates prospects announced by the FED, helping the British pound to advance to fresh annual highs.

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