PoundSterlingLIVE - The Pound to Dollar exchange rate went back above the 1.23 level and approached 1.24 following the release of U.S. inflation data for October that showed inflation in the world's largest economy had softened more than the market was expecting.
The Dollar was sold after official figures showed headline CPI inflation rose 3.2% in the year to October, which was less than the 3.3% figure the market was expecting and represented a sharp slowdown on September's 3.7% reading.
CPI inflation was flat on a month-on-month basis, down on September's energy-infused 0.4% advance and below expectations for 0.1%. The outcome boosts a market narrative that the Federal Reserve has done enough to bring inflation back to the 2.0% target.
Above: GBPUSD at 15-minute intervals showing a sizeable reaction to U.S. inflation figures. Set up a daily rate alert email to track your exchange rate OR set an alert for when your ideal exchange rate is triggered ➡ find out more.
The all-important core CPI inflation figure stood at 4.0% year-on-year in October, below expectations for an unchanged reading of 4.1% from September. Month-on-month core read at 0.2%, down on September's 0.3%, which is also what the market was looking for.
Market bets for a further Federal Reserve rate hike promptly retreated, and investors brought forward expectations for the timing of a first potential rate cut.
U.S. bond yields fell in reaction, boosting demand for equities and diminishing demand for the Dollar.
"Although core inflation is currently declining only slowly, there are increasing signs this will speed up in early 2024 amidst a softening economic backdrop," says Lindsay James, investment strategist at Quilter (LON:QLT) Investors. "Today’s inflation data in the US has offered a further signal that the Federal Reserve’s work on interest rates is probably done."
The October inflation numbers reflected falling global oil prices as the energy component printed down 4.5% y/y in October and down 2.5% month on month.
Maintaining upside pressure to the inflation basket were rents, with the shelter component rising 0.3% m/m.
"The path back down to target is going to be a long and arduous one and may just give the Fed enough cover to ignore the calls for rate cuts for now, no matter how noisy they get," says James.
An original version of this article can be viewed at Pound Sterling Live
