Inflation data dominated sentiment towards the dollar on Friday – and continued to impact it yesterday. Consumer prices rocketed above the US Federal Reserve’s 2% target in April, the Commerce Department reported Friday. The Core Personal Consumption Expenditures Price Index – the central bank’s preferred gauge of inflation – jumped 3.1% from 12 months ago, exceeding market forecasts of a 2.9% rise. This represented its biggest annual gain since 1992 and can be attributed to the pandemic recovery.
However, the high reading was taken with a pinch of salt because the comparison was made with a period when prices were severely depressed by the first Covid-19 lockdown. Therefore, the annual rise in the index is expected to moderate later this year, causing some investors to remain cautious.
US inflation’s vault higher occurred alongside a sharp deceleration in personal income, which decreased 13.1% – although the decline was less than the 14% expected by economists. This followed a 20.9% surge in personal income in March on the back of the latest round of government stimulus.
A busy day in the US data diary on Friday also included the Chicago manufacturing reading for May, which came in at a higher than expected 75.2 – its highest level since November 1973; and the University of Michigan consumer confidence reading for May, which declined to 82.9, just economists’ forecasts of 83.
Having settled just below the 1.42 level over the weekend, the pound to dollar rate edged above the resistance level yesterday as the dollar came under pressure and headed for its second consecutive monthly loss against the pound. The US currency was feeling the weight of trader sentiment as market participants assessed the impact of the US inflation surge ahead of monthly jobs data later this week.
Pound Climbs in Value Overnight
The pound climbed to a three-year high of 1.4250 against the dollar overnight, as traders bet that Britain’s vaccine rollout will help the nation’s economic recovery gain traction.
This morning, Nationwide showed that British house prices rose 10.9% last month compared with the same period last year – the largest annual increase in almost seven years. According to the mortgage lender, house prices were 1.8% higher than in April. Economists had expected prices to rise 9.2% in annual terms and 0.8% from the previous month.
Spring bank holiday in Britain and Memorial Day in the US meant the economic data calendar was bare on both sides of the pond yesterday.
The Markit UK Manufacturing PMI is slated for release today and is expected to hold steady at 66.1%; while over in the US the ISM Manufacturing PMI hits the headlines, which is also forecast to hold firm at 60.7%.
This week will be crucial for determining if the UK’s lockdown restrictions will be fully lifted on 21 June – an outcome that will likely influence the pound – as the impact of the Covid-19 ‘Indian variant’ becomes clearer.
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