We are looking at a continuation of the US dollar weakness so far on Wednesday with GBPUSD jumping back through highs and trading close to the 1.4100 handle. The continuation comes after the reversal of yesterday’s dollar gains following the higher than expected US CPI reading. The reversal was seen as a sign of the need the inflation push is not the be all an end all for interest rates, despite the initial feeling of almost confirming that 2018 would have 4 rate hikes.
Despite the continued weakness during Wednesday’s session, we have seen interest rate probability jump for March to 99% chance of a rate hike, with this move now looking fully priced into the market. After hiking interest rates at their first meeting of the year at the start of Feb in Janet Yellen’s last meeting as Fed Chair we now look to Jerome Powell to hike rates in his first meeting, but as well as that we now look to further rate hikes in June and November.
A hawkish Fed and a tightening of monetary policy are usually US dollar positive, however rather than reading yesterday’s CPI increase as policy tightening story, the other school of thought is that it’s a sign of the slowing economy. A slowing growth picture, even moderately, is enough to tick inflation higher.
GBPUSD has broken above the key 61.8% retracement level from the move in February, however, it has failed at the 1.4100 handle once already today and looks reluctant to push on through. The high and subsequent next upside level will be the 1.4095 level and any moves around here in the short term will be sold. We should also be aware that any break above that 1.4100 could well trigger the stops of many traders looking to short the GBPUSD and bank of US dollar strength returning.
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Soaring US yields trigger the wrecking ball effect as yields become a source of volatility for risk, rather than a source of support