Sterling Plummets Following Unexpected Decline in British Inflation
The dollar regained ground on Thursday after a strong rally in U.S. stocks came to an abrupt end, prompting investors to seek safety. Additionally, the pound took a hit as British inflation unexpectedly dropped. This decline in inflation sent sterling tumbling, recording its sharpest drop in two months and reaching a two-year low in October with an annual rate of 3.9%. The currency fell 0.7% to $1.2638.
Analyst Marios Hadjikyriacos from brokerage XM commented that the data indicates a loss of inflation momentum in the UK, which could lead to the Bank of England joining the global rate cutting cycle in the coming year. Traders reacted to this news by rushing to price in rate cuts expected by May.
Furthermore, heavy selling during the final hour of equities trade on Wall Street increased risk aversion in markets, causing the greenback to rise from its previous lows. As a result, the Australian and New Zealand dollars retreated from their five-month highs. The Australian dollar was last seen at $0.6714, having reached its highest level since July at $0.6779 the day before. Meanwhile, the yen found support at 143.5 per dollar after facing losses earlier when the Bank of Japan maintained its ultra-easy policy settings.
Focus Shifts to U.S. Core PCE Index Release
Looking ahead, currency markets are turning their attention to Friday’s release of the U.S. core personal consumption expenditure (PCE) index. Analysts predict a rise of 0.2% in November, with the annual inflation rate expected to slow to 3.3%. There is speculation among analysts that the balance of risk leans towards the downside, indicating that the Federal Reserve may need to ease policy to prevent real rates from increasing.
However, despite the anticipated rate cuts already factored in for next year, the bond market experiencing a significant rally, and the dollar index dropping over 4% from its early November peak, there are signs of caution emerging. The dollar index, down 1% for the year so far, remained steady at 102.37 during early Asia trade on Thursday. Additionally, ten-year U.S. Treasury yields reached a seven-month low of 3.847% in New York.
The Chinese yuan weakened against the rising dollar in overnight offshore trade, with traders perceiving no change in China’s accommodative monetary stance. It remained stable at 7.1480 to the dollar on Thursday. In the cryptocurrency market, Bitcoin briefly surged above $44,000 on Wednesday before stabilizing at $43,667 on Thursday.
Currency Bid Prices at 0045 GMT
- Euro/Dollar: $1.0950
- Dollar/Yen: 143.4350
- Euro/Yen: 157.02
- Dollar/Swiss: 0.8624
- Sterling/Dollar: 1.2643
- Dollar/Canadian: 1.3351
- Aussie/Dollar: 0.6744
- NZ Dollar/Dollar: 0.6259
Market Analysis
In the Tokyo Forex market, volatility info was reported by the BOJ.