GBP/USD Ready To Rebound As Yields Fall, UK Reopening Nears, Bulls In Control

Two steps forward after one step backward? That has been cable’s pattern in recent weeks and there is no reason it cannot continue all the way to 1.40. The current downside correction has been the result of a strengthening US dollar which is driven by elevated stimulus expectations.

President Joe Biden has been working to pass his proposed $1.9 trillion coronavirus relief package and Democrats are reportedly planning to pass it by February 26. While there may be compromises on potential delays, it is clear that America will get a big fiscal boost. While stock markets continue cheering these prospects, concerns about massive debt issuance and potential inflation have driven investors away from bonds. The resulting surge in yields is making the dollar more attractive.

However, the dollar may fall back down due to three reasons. First, bargain-seekers may jump back into bonds at current prices, lowering yields back from levels seen before the pandemic.

Secondly, consumer prices are hamstrung by the still-struggling economy. Around 10 million Americans are still out of work due to the pandemic and that cripples spending. Economists expect US Retail Sales figures for January to bounce after two miserable months but that may be wishful thinking.

Third, and perhaps most importantly, the Federal Reserve is set to continue easing despite fears of higher inflation. The world’s most powerful central bank changed its policy last year and it is now prioritizing full employment, even at the expense of high inflation. The Fed previously acted too soon to chase the ghosts of price rises only to prematurely choke the recovery.

The FOMC Meeting Minutes published later in the day will likely confirm the Washington-based institution’s Laissez-faire approach to inflation – ensuring traders that the Fed is there to buy bonds, lower yields and support markets.

Across the pond in London, Prime Minister Boris Johnson is under growing pressure to bring as much economic activity as possible back to life. He is set to announce changes on Monday, following a sharp drop in COVID-19 cases, hospitalizations, and deaths.

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