Above: File image of Governor Waller. Image: Federal Reserve.

The Pound to Dollar exchange rate breached 1.27 for the first time since September, but Pound Sterling is left looking technically overbought at the time of writing on Wednesday, suggesting it's time for cool heads to prevail.

Pound-Dollar peaked at 1.2732 in early midweek trade following a sizeable selloff in the U.S. Dollar in the wake of comments from a prominent member of the U.S. Federal Reserve.

The exchange rate has since pared the advance to dip below 1.27 as the market looks to catch its breath following four days of sizeable gains.

"The US dollar accelerated its tumble," says Charalampos Pissouros, Senior Investment Analyst at XM.com.

"This time it was Fed Governor Chris Waller who pushed the greenback off a cliff as the normally hawkish policymaker made a surprise turn and said that if the decline in inflation continues for several more months, they could start lowering the policy rate," he explains.

Pissouros says this was the first time a Fed official has discussed the possibility of a cut.

We have seen foreign exchange markets prove particularly responsive to any mention of rate cuts from leading central bankers; an example was provided earlier this month when the Pound fell after Bank of England's Chief Economist Huw Pill appeared to condone market bets for rate cuts to start from the summer of 2024.

"Investors may be thinking that if a well-known hawk is now considering rate reductions, some other members may be keener to push the cut button at some point during the first half of the year," says Pissouros of Waller's comments.

Above: GBPUSD at daily intervals with the RSI shown in the lower panel. Track GBPUSD with your own custom rate alerts. Set Up Here.

Waller has prompted participants to add to their cut bets, with a 25bps cut now being fully priced in for May.

"Prior to Waller’s speech, the first cut was fully pencilled in for June. Also, the full number of basis points worth of rate cuts for next year has increased from 90 to around 110," says Pissouros.

But the rise in the Pound-Dollar exchange rate has now reached overextended proportions, according to the daily Relative Strength Index (RSI).

The RSI is now above the critical 70 level (see the lower panel in the above chart).

A move above 70 signals overbought, and we expect the RSI to revert into the 30-70 range as consolidation or retracement evolves in the Pound-Dollar exchange rate.

The rally has been fast and furious over the past few days, and it could now be time to see some calmer waters to allow the market to readjust, particularly as month end comes about.