Pound Slumps to Fresh Two-year Lows against Dollar

• GBP/USD hits new lows
• Amidst renewed USD buying
• As global markets selloff again
• Jackson Hole is week's key USD event

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The Dollar has strengthened sharply over recent days and further gains would be likely should global stock markets fall further from recent highs, but this week's Jackson Hole symposium will form the domestic highlight for the U.S. currency.

The Dollar rose against the Euro and Pound at the start of the week as investors reacted to another excruciating surge in European natural gas prices, betting the region was set for a deep recession.

Falling stock markets naturally aided the 'safe haven' Dollar and with the gas crisis unlikely to end anytime soon further strength should be forthcoming.

"Risk aversion rather than the Fed policy outlook should remain the main support for the high-yielding, safe-haven USD from here," says Valentin Marinov, who heads FX research at Crédit Agricole.

The Pound to Dollar exchange rate (GBP/USD) fell a further half a percent Monday to 1.1750 - exceeding the July 2022 low of 1.1760 and taking the market back to levels last seen during the height of the Covid panic of March 2020.

This meant those transferring into dollar were doing so at rates around 1.1530 and those using independent specialist providers were doing so around 1.1735.

Above: GBP/USD fell to a new two-year low on August 22. Set your FX rate alert here to be notified on upcoming key movements.

Although the Dollar has surged against both the Euro and Dollar Crédit Agricole tell clients the move is starting to look extended and the two European currencies are beginning to look oversold.

"Our measures of short-term fair value for both EUR/USD and GBP/USD that incorporate both short-term rate spreads and risk aversion metrics already seem to suggest that the recent selloff of the two USD-crosses have once again moved into deeply undervalued territory," says Marinov.

Therefore, a countertrend bounce could transpire ahead of Friday's speech by Federal Reserve Chair Jerome Powell.

But for now, bounces are bound to be viewed as temporary.

"Should a persistently hawkish message from Fed Chair Jerome Powell on 26 August rattle global risk sentiment, the USD could be the main beneficiary," says Marinov.

The Jackson Hole Economic Symposium hosted by the Federal Reserve Bank of Kansas City will be held August 25-27 and the topic is "Reassessing Constraints on the Economy and Policy."

Powell is due to speak 15:00 BST.

We also look out for other central bank speakers, with the full lineup only likely to be detailed ahead of proceedings Thursday.

"We think this will be a good opportunity to gauge how policymakers are thinking ahead of their next policy decisions, and an opportunity for Fed officials in particular to set out clear criteria to the market heading into September’s key data releases," says Kamakshya Trivedi, Co-head of Global FX Strategy at Goldman Sachs.

Goldman Sachs are not looking for fireworks from the Fed Chair, saying the conflicting nature of incoming U.S. data does not warrant a clear shift in either direction.

Those looking for higher stocks will hope Powell will signal the need to accelerate interest rate hikes have eased since recent CPI inflation data that showed inflation in the U.S. might be peaking.

Indeed, any such development would on net hamper the Dollar and allow the likes of GBP/USD and EUR/USD to recover.

"The somewhat conflicting signals from the stronger-than-expected July employment report and then the softer-than-expected July CPI report should mean a more balanced perspective ahead of the upcoming data in September, given the Committee has clearly indicated a data-dependent stance and a desire to slow the pace of hikes, but only if the data allow it," says Trivedi.

If correct, the Dollar will likely continue to take guidance from global factors and any post-Powell reaction would likely be short lived.

Therefore the Dollar's dominance is unlikely to be challenged anytime soon.