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High inflation supported the US dollar and sent the pound down from its highs.
Tuesday belonged to the US dollar, with October’s hotter than expected inflation report the catalyst for sizeable gains over the pound and the euro.
Sterling stayed within touching distance of its best level against the euro in a year and a half. Yet although prices have been on the agenda this week, focus will soon shift to tomorrow morning’s quarterly GDP data, a significant economic data point that could knock the pound further off its perch.
The ripple effect of American price pressures spilled over into UK government borrowing costs, which climbed to their highest in the week. Britain is in the slightly uncomfortable situation where the cost of its debt tends to move in line what that of the US, so seeing those inflation figures was probably not the outcome Number 10 would have been after.
The US Bureau of Labor Statistics took the unusual step of only producing monthly inflation figures. That was due to the government shutdown last year, which it said would distort the annual metrics. Economists had expected the annual inflation rate to come in just shy of 4%, the highest since May, but we’ll have to wait until next month for the next confirmed read.
Still, the brighter mood that has marked this week has carried over into this morning. Falling oil prices and hopes of an end to the conflict in the Middle East (at least from a military standpoint) encouraged investors to move towards risk-on assets, even if anticipation of higher interest rates weighed on some of the big tech names.
Wednesday looks unusually quiet from a data perspective, but Britain is bracing for a highly significant GDP report tomorrow morning. With negotiations to end both the war in Ukraine and the Middle East upcoming, any developments on those fronts could lead to sudden movements in key exchange rates before the week is out.
GBP: Inflation risks ‘crystallising’
The pound weakened against both the dollar and euro as the US inflation surprise dominated proceedings. Some more hawkish comments by Bank of England deputy governor Clare Lombardelli may have helped limit the fall. Refusing to rule out consecutive hikes, Lombardelli said the conditions for persistent UK inflation were ‘crystallising'.GBP/USD: the past year
EUR: Energy not enough
Falling energy prices have been a particularly welcome development for the eurozone, but they are unlikely to reverse the euro’s fortunes on their own. Inflation is still rising fast and markets will be listening closely to today’s busy agenda of European Central Bank speeches for clues ahead of the December decision.GBP/EUR: the past year
USD: Waller suggests bumper hike
The Federal Reserve has not increased interest rates by 0.5% since 2022, but that’s exactly the solution Christopher Waller floated yesterday. A bumper Christmas hike would certainly be a surprise, but that those comments came right before a hot inflation report points to at least a risk the Fed could go all out on containing inflation.USD/GBP: the past year
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