GBP/USD Suffers Altitude Sickness, New Powell-powered Rally May Wait

Overheating requires a quick cooldown – not US inflation, but rather GBP/USD’s rally. Jerome Powell, Chairman of the Federal Reserve, has pushed the dollar down by promising ongoing support to the economy. This “Powell Put” for stocks also contributed to propelling the pound to sky-high levels of 1.4240, last seen nearly three years ago. The reality check has come now.

Sterling’s upside move was also underpinned by speculation that the UK may accelerate its exit from restrictions before the government’s June 21 target date. Reports by the British press have yet to be confirmed – and will likely turn into nothing.

Quick vaccine-led recovery in Britain also led some market participants to bet on the Bank of England raising rates sooner rather than later. Similar to hiking borrowing costs in America, UK bond yields signaled an early move in response to higher inflation expectations. However, BOE Governor Andrew Bailey and his colleagues – slated for public appearances on Thursday – will likely play down any such move.

Bloated estimates about Britain’s bounceback are behind the fall, but the picture remains positive for sterling as the vaccination campaign continues at full speed.

Back to the US, Powell appears before Congress again on Wednesday and will likely reiterate that the Fed “is not thinking about thinking of raising rates” as he once said. Stressing that ten million Americans remain unemployed and that the Fed is there to keep long-term borrowing costs low should alleviate markets. For the dollar, while ten-year Treasury yields hold below 1.50%, the dollar’s gains will likely be limited.

Investors will also be awaiting stimulus news. The House is set to approve the $1.9 trillion bill on Friday but the real battle is in the Senate. Any comments from members in the upper chamber may rock markets.

All in all, once the correction is over, GBP/USD has room to rise.

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