After consecutive days of little activity in the foreign exchange markets, soaring US inflation data published yesterday afternoon finally gave investors something to act on. January’s Inflation Rate hit fresh 40-year highs on Thursday, coming in at 7.5%. On a monthly basis, Core Inflation rose by 0.6%, which was a “steeper increase than predicted by economists, as Americans paid higher prices for a wide range of goods, including food, electricity and shelter”. Consistent high inflation readings “has already prompted the Fed to speed up its timetable for tightening monetary policy, with the first interest rate increase since the onset of the pandemic expected to be approved next month”. Many economists have argued that the Fed “may have to take a more forceful approach to cool down the economy this year, with larger and more frequent interest rate increases rather than doing so gradually”. The Dollar initially spiked on the news as investors increased their bets on the Fed raising interest rates. But as the session played out, the Greenback dropped and both Sterling and the Euro were able to break out of their recent trading ranges and notch solid gains against the US Dollar.
GBPUSD started the Thursday session comfortably at 1.3552. But after the US data releases, Cable saw heightened volatility and was able to climb back into the 1.36 territory. GBPUSD finally closed the session at 1.3630.
GBPEUR in contrast traded rather flat on Thursday – opening at 1.1853 and closing at 1.1865.
Similarly to Cable, EURUSD was able to capitalize on high US inflation. EURUSD opened at 1.1433 and closed at 1.1488. While these gains are not monumental, it’s important to note that the pair of late has been trading in narrow ranges.
Looking ahead to today, it another busy schedule. UK GDP YoY was published this morning, coming in at 7.5%. Germany also printed its final Inflation Rate for January, giving a reading of 4.9%. Lastly at 15:00, US preliminary Michigan Consumer Sentiment will be released, expected at 67.5, followed by the Fed’s latest Monetary Policy Report.