GBP/USD Buying Opportunity? Fed Fallout May Make Way To BOE Boost

What a difference a day makes – investors have changed their reaction to the Federal Reserve’s dovish decision and are now pushing Treasury yields and the dollar higher. Will sterling succumb to pressure?

The world’s most powerful central bank surprised by signaling it would only raise interest rates in 2024. Moreover, the Fed’s reactions are now “outcome-based” rather than trying to stay ahead of the curve. The Washington-based institution would begin talking about the tapering of bond buys or rate hikes only after the economy significantly bounces back. Prospects of lower borrowing rates for longer are music to markets’ ears – stocks advanced and the dollar dropped.

However, that was Wednesday, and the mood has changed on Thursday. The narrative has shifted to Federal Reserve Chair Jerome Powell’s optimism – acknowledging stronger growth and a drop in unemployment. If the economy bounces rapidly, perhaps the Fed would raise rates earlier. The US ten-year Treasury yield has shot up to 1.73% in a rapid move that has alarmed traders and sent the dollar back up.

What’s next? In the US, further reactions to the Fed and the movement in yields are set to impact the greenback – with weekly jobless claims serving as a temporary sideshow. A small drop in employment applications is on the cards.

Upbeat BOE?

In the UK, it is all about the Bank of England – and about yields. The Reserve Bank of Australia intervened to lower returns on domestic bonds, and the European Central Bank will ramp up its debt purchases from April. On the other side of the ring, the Fed is only worried about the pace but not about the increase in yields.

Where is the “Old Lady” as the BOE is also known? Probably on the side of the Fed, seeing rising returns on UK Gilts as a sign of better growth prospects. The UK vaccination campaign has already reached more than one in three Brits and coronavirus cases are falling at a satisfactory rate.

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