Dollar higher as big UK inflation drop hits pound

British pound banknote is displayed on U.S. Dollar banknotes in this illustration taken, February 14, 2022. REUTERS/Dado Ruvic/Illustration
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NEW YORK,- The dollar strengthened against the pound on Wednesday after data revealed sharply falling UK inflation, which fueled increased speculation of interest rate cuts by the Bank of England.

British inflation fell in November to its lowest rate in over two years, prompting investors to fully price in a BoE rate cut by May 2024 and assign a nearly 50% chance of a cut by March.

“A number of banks have seen pricing for (interest rate) cuts being front loaded. I think Bank of England was just a little bit behind because the inflation is higher, but it’s now starting to move in the same direction,” said Vassili Serebriakov, foreign exchange and macro strategist at UBS.

“Also, the pound has had a good run in the past couple of weeks, I think it’s just reversing some of those moves,” Serebriakov said.

The pound was down 0.5 % at $ 1.26665 , after slipping to a 2-day low of $ 1.2631 . For the month, the pound remains up about 0.4% against the dollar.

More broadly, the dollar was little change against a basket of currencies. The dollar index, which tracks the U.S. currency against six peers – was last up 0.07 % at 102.2 , on pace to snap a two-day losing streak.

U.S. Federal Reserve officials have been pushing back on the idea of rapid rate cuts next year, after last week’s meeting prompted markets to pencil in rapid rate cuts in 2024, sparking a rally in financial markets.

The U.S. currency could also come under pressure from month-end rebalancing by investors.

“Our proprietary month-end rebalancing model indicates a strong dollar selling signal by month-end against all majors,” Barclays strategists said in a note on Wednesday.

“Our already stretched USD sentiment indicator is likely to veer even further into negative territory at the start of 2024,” they said.

Data on Wednesday showed U.S. consumer confidence increased more than expected in December amid optimism about the labor market, which could help to underpin the economy early next year.

The Federal Reserve’s dovish December pivot has boosted the case for the weakening dollar to keep falling into 2024, though strength in the U.S. economy could limit the greenback’s decline, according to investors.

Investors now await U.S. inflation data on Friday, for clues to future Fed policy actions.

Meanwhile, European Central Bank policymaker Joachim Nagel said in an interview published on Wednesday that euro zone interest rates must remain high and traders betting on upcoming cuts in borrowing costs should be careful. The euro was 0.09% lower at $1.097.

The dollar fell 0.17% against the yen to 143.6, a day after the Bank of Japan maintained its ultra-loose monetary policy and opted to wait for more evidence to justify a shift.

“The last thing (the BOJ) wants to do is to have to undo (a rate hike) again in a couple of months’ time,” Rob Carnell, Asia-Pacific head of research at ING, said.

Japan’s government is aiming to reduce its budget next fiscal year for the first time in 12 years, Reuters reported on Wednesday.

In cryptocurrencies, bitcoin gained 4.4% to $44,118, its highest since Dec. 9 . A spate of filings for spot bitcoin and ether ETFs, including from traditional finance heavyweights, has helped revive the crypto market this year after a series of meltdowns in 2022.

Source: Reuters