Powell Calms Markets As Pound Losing Touch With Reality

24 Şub 2021

The main news event yesterday was the Fed Chairman Jerome Powell’s speech in the Senate made for the banking committee. The sharp rise in Treasury yields in recent years has provoked fears in the markets of an inflation spiral. The rise in inflation would have its consequences to tighten the monetary policy of the Fed (in the end, the Central Bank’s main goal is to maintain the national monetary unit’s stability).
Tightening monetary policy would mean the end of this eternal holiday in the stock market, cryptocurrency market and others, where huge bubbles were inflated. That is, the growth of the FRS rate is such a needle that will burst bubbles.

So there was a lot at stake. But Powell’s confirmed that the current Fed is a very predictable structure that isn’t going to dazzle the markets with surprises and other surprises. Powell did his best to calm the markets yesterday. And he said that

• Inflation wasn’t a threat
  
• The Fed will continue ultra-soft monetary policy, and
  
• The labor market in the current economic recovery is more important than some kind of inflation.

In general, the sharp rise in risky assets (stock and cryptocurrency markets) after his speech looked more than natural and in some ways even natural.

The growth of the pound seems to be less logical and reasonable. Over the past six months, it has strengthened by more than 1500 points together with the dollar. Yes, Brexit went through a soft deal, but the infection cases number’s falling and the vaccination campaign is going well.

But on the other side of the scale there are no less factors. These factors would be supposed to range from the most severe economic crisis for Britain in the last 300 years, ending with chaos on the border with the EU and the potential exit of Scotland from the UK.

Yesterday’s data on the labor market very clearly demonstrated the illogicality of what is happening in pound pairs. Unemployment was at its highest levels in the last 5 years and about 4 million people were temporarily unemployed in December. But against this background, the pound soared above 1.41.The fundamental divergence seems to be already large enough to start short-term positioning in pound pairs.