PoundSterlingLIVE - Pound Sterling traded higher against the U.S. Dollar following the release of data that showed U.S. inflationary pressures continued to ease in July, boosting market confidence that the Federal Reserve won't raise interest rates again in September.
U.S. inflation rose 3.2% in the year to August according to an official release, which was below the 3.3% expected by markets, albeit still higher than June's 3.0%. Month-on-month inflation was unchanged, and in line with expectations, at 0.2%.
The all-important core CPI reading stood at 4.7% y/y, less than the 4.8% the market was expecting and down on June's 4.8%. Month-on-month core inflation was also unchanged and met consensus expectations at 0.2%.
The Pound to Dollar exchange rate extended a near-term recovery to go 0.75% up on the day to 1.2810, with the Euro-Dollar seen up by an equal amount at 1.1056.
This left the cross exchange rate that is GBP/EUR unchanged at 1.1587.
"The August number will be out before the Fed next meets in mid-September, but there is nothing in this release to suggest that they will do anything other than keep interest rates exactly where they are. It is increasingly looking like the Fed has done a good job, for now anyway. While we could see inflation track upwards again, markets will be giving them the thumbs up in the short term," says Neil Birrell, Chief Investment Officer at Premier Miton Investors.
The Dollar strengthened through the second part of July and into early August amidst rising U.S. bond yields that are in turn a reaction to a string of stronger-than-expected U.S. economic releases.
Markets have been betting the economy remains in robust shape and would be able to withstand further Fed rate hikes. However, rising yields and Fed hike expectations have weighed on equity markets of late, creating the kind of risk-off conditions that further fuelled a USD comeback.
But the softer inflation data reading suggests the Fed can afford to pause the hiking cycle, thereby boosting equity markets and reversing some of the Dollar's recent outperformance.
Above: GBPUSD at five-minute intervals.
An original version of this article can be viewed at Pound Sterling Live