US dollar demand soars following release of inflation data

Key Movers

Following the release of unexpectedly high inflation data in the US, the euro dipped below 1.06 as investors flocked to the USD, despite their ongoing belief in an extended pause by the Federal Reserve. Additionally, investors analyzed the minutes from the European Central Bank (ECB) meeting. There was a split among ECB members about the decision to increase interest rates or continue the current cycle of tightening, with many seeing it as a difficult choice due to a notable decline in the Eurozone’s economy.

The pound, which had reached a three-week high of 1.234 yesterday, weakened to fall below 1.23 as investors shifted their focus to the US dollar in response to robust US inflation data. Concurrently, the August UK gross domestic product (GDP) report indicated a 0.2% growth in the economy, which was in line with expectations, recovering from a revised 0.6% contraction in July, primarily driven by the expansion of the service sector. However, it is worth noting that manufacturing output declined for the second consecutive period. The persistence of high inflation and ongoing risk related to a recession has prompted concerns among British policymakers as they prepare for the November interest rate decision.

For the second consecutive day, USD/CAD continued to strengthen, maintaining a positive position above 1.3640. The pair is benefitting from upward momentum driven by strong economic data from the US and the release of Federal Reserve meeting minutes. The Canadian dollar is encountering difficulties as oil prices have pulled back from their weekly highs to trade around $83 a barrel. Nevertheless, the Loonie has seen an increase in value driven by heightened tensions in the Middle East, particularly because Canada holds the position of being the largest oil supplier to the United States.