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Dollar to Pound Exchange Rate Rallies as US Inflation Heats

April 11, 2024 - Written by John Cameron


The US inflation data dominated markets on Wednesday. The dollar edged lower into the latest consumer prices release amid hopes for a moderation in inflation, but there was a sharp and substantial reversal as the data again came in above market expectations.

Equity markets also reversed sharply with the FTSE 100 index, for example, sliding to around 7,920 after earlier flirting with the 8,000 level.

The Pound to Dollar (GBP/USD) exchange rate traded just above 1.2700 ahead of the US data before a slide to test support below 1.2600 and dipped further to 1.2565 after the Wall Street open and not far above 8-week lows.

The dollar secured wider gains in currency markets with the Dollar to yen (USD/JPY) exchange rate jumping to 33-year highs around 152.50.

There were no significant UK developments during the day, but there will be stronger expectations that the Bank of England will cut interest rates ahead of the Federal Reserve and this will tend to keep GBP/USD on the defensive unless there is notably strong UK data.

The UK wages and inflation data will be extremely important next week.

US consumer prices increased 0.4% for March, in line with consensus forecasts, although there was a slightly stronger than expected year-on-year increase to 3.5% from 3.2%.

Energy prices increased 2.1% over the year after a 1.1% monthly increase.

Core prices increased 0.4% compared with expectations of 0.3% with the year-on-year rate unchanged at 3.8% and compared with expectations of a small decline to 3.7%.

Apparel prices increased 0.7% on the month while there was a strong 1.5% increase in transport services prices to give a 10.7% annual increase.

Car insurance prices posted a strong monthly increase which was a key element in transport services.

ING commented; “only one forecaster predicted such an outcome so just like last Friday's jobs report this is another significant upside surprise that should quash expectations of a June Federal Reserve interest rate cut.”

It added; “July is also doubtful, meaning September is the more probable start point of any easing, which would limit the Fed to a maximum of just three rate cuts this year.”

There was inevitably a sharp move in interest rate expectations following the data with markets completely pricing out the possibility of a June Fed rate cut compared with a 50% chance of a cut ahead of the data.

The 10-year bond yield also increased to around 4.50% and close to 5-month highs while Wall Street posted sharp losses.

SMBC Nikko Securities Economist Joseph Lavorgna commented; “The core rate of inflation has accelerated four months in a row, maybe you get some moderation later in the year but, you're going to need real weak numbers and more time to be convinced that inflation is trending back down after what appeared to be the case last fall. What that means is the timing of Fed easing is going to get pushed out.

He added; “Maybe you get a couple of cuts, but it's going to have to be in the back half of the year. These are bad inflation numbers.”

Pepperstone Analyst Michael Brown added; "Disinflation progress remains significantly slower than FOMC policymakers would like to see. While there remain two further CPI, and an additional two PCE, reports before the June FOMC, this data clearly tilts the balance of risks in favor of a delayed start to the easing cycle, and fewer rate cuts.

On currencies he commented; "On a broader level, data of this ilk is likely to see the USD continue to gain ground, as risks to the FOMC outlook tilt in an increasingly hawkish direction, while G10 peers look to begin their easing cycles as soon as June."
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