GBP/USD Touches Fresh 8-Month High as Dollar Drops

After nearly a week-long of consolidation in most major currency pairs, volatility has emerged with the dollar dropping broadly.

GBP/USD fell just shy of testing the 1.3300 handle in early European trading to trade at a fresh 8-month high.

The currency pair saw volatility yesterday during Powell’s speech, but a rally attempt was not sustained as the dollar had a mixed reaction to the guidance provided by the Fed Chair.

Powell confirmed that the Fed will move to an average inflation targeting method. This means policymakers will let inflation run above 2% in the short-run to compensate for prolonged periods where inflation has run below targets.

The Fed will focus on achieving 2% inflation over the long-run along with maximum employment.

Later today, Bank of England Governor Andrew Bailey will share the latest outlook on monetary policy in the UK. Bailey has said earlier that the BoE will move interest rates into negative territory if need be but has not signaled any intention to do so anytime soon.

Japanese prime minister Shinzo Abe announced his resignation on Friday as he continues to suffer from poor health. The news has triggered a sharp decline in the Nikkei 225 and the Japanese yen has rallied against all of the major currencies as a result.

The news could trigger a bit of risk aversion into the North American open although the S&P 500 is essentially flat in the pre-market.

Technical Analysis

GBPUSD 4-Hour Chart

GBP/USD is trading above a notable level at 1.3262. The last time the pair closed above this level on a monthly chart was over two years ago.

If the pair sustains the current upward momentum into the month-end, and closes above 1.3262, it would signal a renewal of bullish momentum.

At this stage, it might be too early to call it a bullish breakout, especially as momentum is seen slowing a bit after the pair crossed above yesterday’s high.

The short-term momentum is to the upside, and buyers are likely to defend near-term dips. The first level of support falls at 1.3262 with further support seen at 1.3230.

Bottom Line

  • The dollar is broadly weaker against all of its major counterparts.
  • With only two days left of trading in August, there could be further volatility and possibly erratic swings in currencies.

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