Home Finance Inflation Data Shakes Currency Markets: U.S. Dollar Rebounds as UK Inflation Cools

Inflation Data Shakes Currency Markets: U.S. Dollar Rebounds as UK Inflation Cools

The U.S. dollar experienced a rebound on Wednesday as inflation in the United Kingdom cooled more than expected in June. This unexpected slowdown in Britain’s rate of inflation, which reached 7.9%, was the slowest in over a year. The data eased pressure on the Bank of England (BoE) to pursue aggressive interest rate hikes. Economists had mostly forecasted a smaller slowdown, to 8.2% in the 12 months to June from May’s 8.7%. The surprise inflation dip has cast doubt on the possibility of another significant rate hike by the BoE next month.

Before the release of Wednesday’s data, traders had estimated a roughly 60% chance of a half-percentage point rate hike by the BoE on August 3rd. However, following the inflation data, the likelihood shifted to a 60% chance of a quarter-percentage point hike instead. This sudden shift in expectations had a notable impact on the dollar’s performance, as the inflation data strongly influenced market sentiment.

Joe Manimbo, senior market analyst at Convera in Washington, remarked on the significance of the inflation data in shaping the dollar’s trajectory. He highlighted that the dollar was previously impacted by cooler inflation figures last week, and now the pound’s turn to experience sharp fluctuations following the data release.

As a result of the unexpected inflation slowdown in the UK, the pound sharply fell against the greenback, declining by 0.81% to $1.2929, reaching its lowest level since July 11. This decline is in stark contrast to last Thursday when the pound reached $1.3144, its highest level since April 2022.

Furthermore, the euro also gained 0.59% against the British currency, reaching 0.8662. Alongside the inflation data, the pound experienced profit-taking after a recent rally, leaving it overbought following its significant surge in recent weeks.

The U.S. dollar index rose by 0.32% against a basket of currencies, reaching 100.26. Conversely, the euro fell by 0.24% to $1.1202.

The previous week had seen the U.S. dollar weaken considerably as consumer and producer price gains slowed in June, leading to increased expectations that the Federal Reserve would cease interest rate hikes after an anticipated 25-basis-point increase at its July 25-26 meeting.

Fed funds futures traders are currently pricing in 32 basis points of additional tightening, with the benchmark rate expected to peak at 5.40% in November.

U.S. data released on Wednesday indicated that single-family homebuilding fell in June, while permits for future construction rose to a 12-month high. The severe shortage of previously owned houses for sale has supported new construction and contributed to the ongoing housing market dynamics.

Additionally, the European Central Bank (ECB) is expected to raise rates by 25 basis points in the upcoming week. However, ECB Governing Council member Yannis Stournaras stated that another quarter-point interest rate rise should be sufficient, as further tightening may risk damaging the economy.

In light of the inflation data and central bank rate decisions, the U.S. dollar strengthened by 0.55% against the Japanese yen, reaching 139.62.

The foreign exchange market continues to be influenced by economic data releases, central bank policies, and investor sentiment. Exchange rate movements are subject to numerous domestic and global factors, and central banks play a crucial role in managing their respective currencies to support economic growth and stability.

As inflation remains a key factor in shaping monetary policies and interest rate decisions, central banks closely monitor inflation figures to ensure that their policies remain aligned with their respective economic objectives. Additionally, traders and investors interpret these data releases to adjust their positions and navigate the currency market’s ever-changing dynamics.

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