U.S. Dollar Gains, Sterling Falls on UK Inflation Data
Fed Officials Support Dollar
The U.S. dollar slightly increased in early European trade on Wednesday, while the sterling dropped due to a sharp decline in UK inflation, raising expectations of Bank of England rate cuts next year.
At 03:05 ET (08:05 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher at 101.894, not far from its recent four-month low of 101.76.
The dollar has been under pressure since last week’s U.S. Federal Reserve meeting, where three rate cuts were projected for 2024. However, several Fed policymakers have attempted to temper these dovish expectations, with Atlanta Federal Reserve President and Richmond Fed President expressing caution about the urgency for cuts.
U.S. economic data due on Wednesday focuses on the housing market, with the Fed’s preferred measure of inflation set to be released on Friday, potentially influencing future policy decisions.
Pound Slides on UK Inflation Decline
In Europe, the pound fell 0.5% to 1.2662 after UK inflation plunged in November, dropping to 3.9% from 4.6% in October – the lowest reading since September 2021.
The sharp decline in inflation has led traders to fully price in a rate cut by May 2024, prompting the pound to fall sharply. Meanwhile, the euro also fell 0.2% to 1.0961 after German producer prices dropped more than expected in November.
Both the Bank of England and the European Central Bank kept interest rates unchanged last week, but investors are now anticipating several rate cuts from the ECB next year, potentially in the first quarter.
Yen Stabilizes After BOJ Meeting
Elsewhere, the yen traded 0.2% lower at 143.57, with the currency stabilizing after tumbling from near four-month highs in the prior session. The People’s Bank of China left its loan prime rate unchanged at record lows, highlighting the limited room for policy adjustments to support China’s economic recovery.
Despite the mixed movements in major currencies, the market remains sensitive to economic data releases and central bank statements, with investors closely monitoring developments for future trading decisions.
