Strong US Inflation Data Trumps UK Wages Data, Pound to Dollar Rate Slides Below 1.2600

February 14, 2024 - Written by David Woodsmith

STORY LINK Strong US Inflation Data Trumps UK Wages Data, Pound to Dollar Rate Slides Below 1.2600

The Pound to Dollar (GBP/USD) exchange rate posted robust gains after stronger-than-expected UK labour-market data, but this was more than reversed after hot US inflation data with a slide to 1.2590 from 1.2690 highs.

According to Danske Bank; “Unless we see a notable turnaround in US data, we anticipate the USD to remain strong in the near term.”

MUFG commented; “A strong CPI print looks more likely to prompt a bigger dollar move to the upside as a May cut would be put in further doubt.”

Market pricing of UK and US rate-cut expectations both dipped after the data releases.

US consumer prices increased 0.3% for January compared with consensus forecasts of a 0.2% increase.

The headline annual inflation rate declined to 3.1% from 3.4%, but above market expectations of 2.9% and failing to dip below the 3.0% level.

Core prices increased 0.4% on the month compared with consensus forecasts of 0.3% and the year-on-year rate held at 3.9% compared with expectations of a decline to 3.7%.

Although there were declines in vehicle and apparel prices, services outside the energy sector increased a strong 0.7% on the month with a 0.6% increase in shelter prices.

The Federal Reserve has fretted over underlying pricing pressures within the services sector and the data will reinforce these fears.

Rabobank commented; “No central banker wants to be remembered as the policymaker that cut rates too soon and threw disinflationary pressures off course.”

Following the data, markets priced out any chance of a March rate cut and the chances of a May cut dipped sharply to near 40% from 60% ahead of the data.

Treasuries came under significant pressure with the 10-year yield jumping to near 4.30% from near 4.15% ahead of the data.

Peter Cardillo, chief market economist at Spartan Capital Securities commented; “It’s part of what the Fed has been alluding to when it says it’s too early to say that inflation has been beaten.”

He added; “If this keeps up with another month or two of inflation staying high, you can kiss a June (rate cut) goodbye and we’re probably looking at September.”

Earlier, the UK unemployment rate declined significantly to 3.8% from 4.2% and below consensus forecasts of 4.0% with payrolls estimated to have increased 48,000 for January.

The annual increase in headline average earnings slowed to 5.8% in the three months to December, but this was above expectations of 5.6% and the November increase was revised to 6.7% from 6.4%.

Underlying earnings growth slowed to 6.2% from a revised 6.7%, also slightly above market expectations of 6.0%.

According to Socgen; “The BoE two weeks ago mentioned, like the Fed, it does not have the confidence yet on inflation to cut rates. That won’t change after earnings ex-bonuses slowed in December to 6.2% 3m/YoY, above forecast of 6.0%.”

Deutsche Bank chief UK economist Sanjay Raja commented; "Despite the slowdown in pay growth, today's wage data leans a little more hawkishly. It's now all up to the inflation data to see whether spring rate cuts could still be on the table."

Kallum Pickering, senior economist at Berenberg bank commented; “Past rate hikes are still feeding through the housing market and to businesses that are rolling over debt. To keep the labour market on track and to underpin a broader recovery in economic activity in 2024, the BoE will need to start to take its foot off the brake soon.”

Nomura expects a first rate cut in August.

UK rate futures now predict 69 basis points of cuts this year. Traders saw 110 basis points in cuts from the Federal Reserve in 2024, although this dipped to 94 points after the US inflation data.

Kyle Chapman, FX market analyst at Ballinger and co noted; "The continued persistence of price pressures within the labour market has sterling well bid this morning."

GBP/EUR held gains and traded at 5-month highs.

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TAGS: Pound Dollar Forecasts