Pound-Dollar Extends Beyond 1.30 as USD "Decimated" by Inflation Numbers: XM.com

The Pound-Dollar exchange rate went as high as 1.3050 on Thursday amidst an extension of the USD pullback in the wake of cooler-than-expected U.S. inflation numbers.

Written by Marios Hadjikyriacos, Senior Investment Analyst at XM.com. An original version of this article can be found here.

A 'cold' U.S. inflation report sent shockwaves across global markets yesterday, as investors reassessed the path for interest rates.

Annual inflation as measured by the consumer price index clocked in at 3% in June, just a shade lower than the consensus estimate of 3.1%, but a sharp slowdown from 4% in the previous month.

Core inflation - which strips out energy and food prices - fell to 4.8% from 5.3% in May, also undershooting market estimates of 5.0%.

These numbers reaffirm that U.S. inflation is cooling off, although the Fed hasn’t won the war yet, as underlying price pressures are still a long way from the 2% target and the tightness in the labour market suggests the rest of the journey might be the most difficult part.

The market reaction was explosive, with the biggest casualty being the U.S. dollar, which fell through the trapdoors to hit a new 15-month low against a basket of major currencies.

Above: The Pound to Dollar rate rally extended to above 1.30 on Thursday.

This mirrored a similarly sharp drop in US yields, as traders concluded that July will probably be the Fed’s final rate increase of this cycle.

With rate differentials compressing, it was the yen’s turn to shine.

Dollar/yen has fallen by almost 4% since Friday, a dramatic move even for yen standards, which has been fueled both by the unwind in Fed rate bets and by speculation that the Bank of Japan might finally adjust its yield curve control strategy later this month.

Stock markets went into overdrive in the aftermath of the inflation report, extending the impressive rally this year.

The S&P 500 stormed higher to hit its best levels in 15 months, closing just 7.2% away from its record high as the cold inflation report reinforced optimism that the US economy can achieve a soft landing.

The spotlight will now shift to the earnings season, which will fire up tomorrow with several major US banks reporting.

Similar to last quarter, analyst estimates have declined heading into this earnings season, setting the bar so low that corporate America will probably have an easy time jumping over it and delivering positive earnings surprises. This dynamic might be the next source of power for equity markets.

Gold prices enjoyed a fantastic session too, piercing above some key resistance levels to trade above the $1,960 level early on Thursday.

With real U.S. yields and the dollar falling without a parachute, investors got the green light to load up on bullion, which is now less than 6% away from record highs.

The next major barrier to watch on the upside is the $1,970 - $1,975 region, which acted both as support and resistance this year.

Elsewhere, the Bank of Canada raised interest rates yesterday, yet the reaction in the FX market was minimal as the move was widely expected and the central bank refrained from clearly signalling that more hikes are on the way.

In China, a batch of disappointing trade numbers passed almost unnoticed.

As for today, the main event will be the latest round of U.S. producer prices, which could help cement expectations that inflation is on its way down.

Jobless claims will also be closely watched for any clues on the health of the U.S. labour market.

Over in Europe, the minutes of the latest ECB meeting will be released, although they are unlikely to contain any major euro-impacting revelations.