The pound hit a new two-month high against the dollar on Wednesday, as the US currency dropped back despite a jump in inflation.
The UK currency touched 1.3690 for the first time since 4 November when it slid lower after the Bank of England surprised markets by holding interest rates at a historic low 0.1% – although the central bank did act in December.
GBP USD has gained more than 3.5% since the December trough, breaking above the 1.36 resistance level and testing 1.37.
By this morning, the pair had climbed above 1.37 for the first time since the end of October.
US inflation jumped 7% in December
The dollar eased back on Wednesday after official data showed US consumer prices jumped higher in December, but in line with economists’ forecasts.
The surge in consumer prices last month saw inflation increase at its fastest annual rate in nearly four decades, stoking expectations that the Federal Reserve will start raising interest rates as soon as March.
Data released by the Labour Department on Wednesday showed the consumer price index (CPI), which measures what consumers pay for a wide range of goods, rose 0.5% in December compared with the previous month and 7% compared with December 2020 – the biggest year-on-year increase since June 1982.
Speaking after the release of the CPI data, US President Joe Biden said: “This report underscores that we still have more work to do, with price increases still too high and squeezing family budgets,”
Red hot inflation is pulling further away from the Fed’s flexible 2% target and is also being pushed higher by wage pressures as the labour market tightens.
Fed Chair Jerome Powell said on Tuesday that the central bank is prepared to do what is necessary to prevent soaring inflation from becoming “entrenched”.
Initial jobless claims for the week ended 7 January and the producer price index (excluding food and energy) are scheduled for release from the US economy today.
Investors in the dollar will also monitor testimony from Governor Lael Brainard today for clues to the timing and pace of interest rate rises.
Retail sales data hits the headlines in the US on Friday, proving further oversight of the current inflation story.
A clutch of influential data sets are pencilled into the UK economic calendar tomorrow: industrial production, manufacturing production and the latest gross domestic product reading – which is forecast to tick higher.
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