May US Housing Starts Surprise Makes Markets Nervous About Fed Pause

Powell's testimony in Congress had a negative impact on the dollar, causing the US currency index to bounce off the upper boundary of the bearish channel, dropping by 102 points and forming a double bottom reversal pattern:Yesterday, the head of the Federal Reserve expressed uncertainty about the need for future tightening and used a highly elusive statement, suggesting that "it may make sense to continue raising rates at a moderate pace." After the market didn't believe the Dot Plot, which indicated two more rate hikes this year but instead only one incomplete hike has been priced in, investors expected verbal interventions from Powell that would reaffirm the expectation of two increases. However, that didn't happen.A strong positive surprise for the markets was the release of data on private construction investment. The month's pace of home starts accelerated to 1.631 million, surpassing the forecast of 1.4 million:The volume of issued permits also exceeded expectations, reaching 1.491 million compared to a forecast of 1.42 million. Following the release of the statistics, Goldman Sachs raised its forecast for US economic growth by 0.1% to 1.8% on a quarterly basis.As we can see, the incoming data gradually sets the foundation for a more restrictive policy. If the data continue to be optimistic, policymakers will have no choice but to remind the markets about the validity of the Dot Plot (which forecasts two more rate hikes). Currently, expectations lean toward the Federal Reserve adopting a less aggressive tightening trajectory. However, if there are new hawkish surprises in the data, the shift could be quite swift.Today, the Bank of England also held a meeting and made an unexpected decision to raise rates by 50 basis points to 5%. Furthermore, they stated that the persistently high inflation justifies further policy tightening. Despite the aggressive above-forecast tightening, the reaction of GBPUSD was ambiguous. After a brief upward spike, the pair turned downwards as concerns grew that the central bank may tighten too aggressively and ultimately hamper growth. The central bank's policy has already been priced in, and now the pricing of the pair will depend on changes in dollar expectations. In my opinion, since the central bank's unexpected action failed to boost the pound, the pair remains vulnerable to further decline amid increased stagflation risks. The target level remains at 1.26: