ExchangeRates.org.uk - The Pound posted significant gains in immediate response to the latest UK inflation data, but was unable to capitalise on the advance against the dollar.Reports that Ukraine had launched UK Storm Shadow missiles against Russian targets triggered a fresh setback in equity markets and provided an element of defensive dollar support.
The Pound to Dollar (GBP/USD) exchange rate hit highs at 1.2715 before gradual erosion and significant losses to below 1.2650 and not far above 6-month lows as the dollar secured renewed gains.
Scotiabank (TSX:BNS) commented on the reversal; “That should drive more pressure on short-term consolidation support at 1.2630/35.” It sees scope for losses to 1.2575.
In contrast, the Pound to Euro (GBP/EUR) exchange rate held gains to trade around 1.2010.
In terms of interest rate expectations, UK and US rate-cut expectations have been scaled back and the Euro area remains a clear loser.
Money markets show traders expect the BoE to cut rates by just over 50 basis points (bps), by December 2025, compared with 75 bps from the U.S.
Federal Reserve and near 160 bps from the ECB.
The dollar overall has secured fresh gains during the day.
According to Scotiabank; “Rising US yields and still resilient growth prospects plus expectations of dollar-positive policies form the incoming administration are refreshing “US exceptionalism” argument in favour of the USD.”
Bank of America (NYSE:BAC) economist Juneau added; "We'll see deregulation, easier fiscal policy, more protectionist trade policy and a tighter immigration stance.
They all kind of pose an upside risk to inflation; the Fed is unlikely to cut as deeply as we previously considered because they're going to see inflation continue to be stuck above their target."
The bank does not now expect the Fed Funds rate to drop below 3.75%.
Rabobank chief FX strategist Jane Foley expects a period of range trading rather than a breakout; “Having priced in a lot of the Trump trade, we might be in consolidation phase until early January when Trump does take the reins and we get a firmer idea of the detail of the policy."
Markets were also continuing to react to the latest UK inflation data with the headline rate rising to 2.3% from 1.7% and above expectations of 2.2% while the core rate edged higher to 3.3% from 3.2% and above forecasts of 3.1%.
Premier Miton chief investment officer Neil Birrell put the data into perspective; "UK inflation was slightly higher than expected in October, although not by enough to be concerning.”
He added; "However, if we do see food prices rising as well, the rather stagnant economy could come under more pressure, so attention will focus on the Bank of England’s policy approach."
Markets are even more confident that the Bank of England will hold rates at 4.75% next month before cutting again in February.
This content was originally published on ExchangeRates.org.uk