GBP/USD Risks Breaking Down, Watch Powell Speech

Above: Federal Reserve Chairman Jerome Powell. Image © Federal Reserve.

The Pound to Dollar exchange rate (GBPUSD) retains a heavy tone amidst soft global investor sentiment and fears that the Chair of the Federal Reserve will signal a further rate hike when he speaks later today.

GBPUSD could record a third successive daily close if Jerome Powell's speech propels the Dollar's short-term advance, particularly if he doubles down on a message that U.S. interest rates will stay higher for longer.

"We expect Powell to reiterate the FOMC view that another hike in the Funds rate this year is more likely than not. A reiteration of the 'higher for longer' message on interest rates may allow US yields to stay at or above their current levels and keep the USD supported," says Kristina Clifton, a currency strategist at Commonwealth Bank.

Ahead of the speech, scheduled for 17:00 BST, U.S. yields reached fresh cycle highs, with two-year treasuries hitting 5.250% and the ten-year reaching 4.967%.

Nevertheless, the rise in yields could prompt Powell into a more circumspect mood that might disappoint some USD bulls. Indeed, rising yields imply tightening financial conditions that aid the Fed's already-delivered interest rate hikes in cooling economic activity and inflation.

Should Powell reference these developments, the market might pare back expectations for a November rate hike, potentially offering the likes of GBPUSD some relief.

"Powell may be asked in the Q&A about the implications of the recent surge in Treasury yields for FOMC policy. It would be a blow to US interest rates and the USD if Powell sided with some of his FOMC colleagues to argue that the increase in yields is a substitute for an increase in the Funds rate," says Clifton.

According to one analyst we follow, such a development would help those market participants wanting a stronger pound: a recent period of underperformance risks turning into a more protracted selloff.

"Sterling is consolidating. Cable gains through the 1.22 are not finding any follow-through support, and sideways consolidation that has developed in trading over the past few days is shaping up somewhat negatively for the GBP potentially (minor bear flag pattern)," says Shaun Osborne, Chief FX Strategist at Scotiabank.

"GBP losses through 1.2145 may drive GBPUSD back to the low 1.2000s. A clear push above 1.2225 resistance is needed to lift the pound," he adds.