Home Daily Commentaries US inflation fall sees dollar drop

US inflation fall sees dollar drop

Daily Currency Update

It’s been a good 24 hours for the pound with GBP/USD soaring from around 1.14 to above 1.17 after a combination of domestic and external factors came to its aid after a torrid few weeks. This morning we have seen a better-than-expected UK GDP number for July-Sept which showed a contraction of just -0.2% when markets were expecting -0.5% to be shown. Although this is very likely to be the beginning of a prolonged recession it appears, we are entering a shallower trajectory than many were expecting, and the pound has benefitted as a result. The rally for the pound started yesterday afternoon when US inflation data came out lower than predicted which saw the pound (and all major currencies) jump against the dollar. Although this data may provide some relief the UK is still facing some strong economic headwinds with double-digit inflation impacting consumer spending power and next week’s Autumn Statement from Chancellor of the Exchequer, Jeremy Hunt expected to outline spending cuts and tax rises of around £55b a year. GBP/USD has touched 1.1750 this morning however the gains versus the euro are far more limited as the euro also rallied on the aforementioned US inflation number. GBP/EUR is currently around 1.1450.

Key Movers

Global stock markets soared, and the dollar fell yesterday as annual inflation in the US receded from 8.2% to 7.7% a bigger drop than forecast. Along with the overall level of CPI, the core number, which strips out volatile food and fuel costs, fell to 6.3% y/y again further than expected. This means that the chances of the Federal Reserve raising rates by 0.75% at its December meeting are lower and it may instead opt for a more modest 0.5% hike which would ease pressure on US consumers who have been experiencing price rises not seen since the early 80s. As a result of the data, the dollar fell across the board with EUR/USD jumping from around 0.9950 to its current level of 1.0260. The Australian dollar, which is often seen as a bellwether of global economic sentiment also soared from around 0.64 and is now heading toward the 0.67 level. Although this news has been well received there are still plenty of issues facing global economies, especially around energy costs as a result of the Russian invasion of Ukraine. China also seems determined to continue with its zero-Covid policy with lockdowns ongoing in major cities in the country causing supply chain issues. Should Chinese President Xi Jinping decide to ease up on the policy as recent rumours have indicated then we should expect to see more stock market gains and further losses for the safe haven dollar however at present it seems the Chinese hierarchy is set to continue with trying to shut out the virus rather than living with it like the majority of the rest of the world.

Expected Ranges

  • GBP/USD: 1.1625 - 1.1800 ▲
  • GBP/EUR: 1.1370 - 1.1510 ▲
  • GBP/AUD: 1.7500 - 1.7700 ▼
  • EUR/USD: 1.0105 - 1.0295 ▲