Pound Surges to New 2024 High against Dollar After Convincing Fall in U.S. Inflation

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The Dollar suffered its biggest daily loss in a month after the U.S. reported that inflation shrunk last month, cementing the likelihood of an interest rate cut at the Federal Reserve in September.

The Pound to Dollar exchange rate smashed through the 1.29 barrier to quote at a new 2024 high of 1.2935 after U.S. CPI inflation printed -0.1% month-on-month in June, down from 0% in May and below expectations for a 0.1% rise.

"Turbo-charging the pound’s recent uplift was data showing US inflation cooled last month, boosting bets of more Fed rate cuts this year and next," says George Vessey, Lead FX Strategist at Convera.

Money market pricing shows the odds of a September interest rate cut at the Fed are now priced as a near certainty after the headline inflation rate fell to 3.0% year-on-year from 3.3%, undershooting expectations for 3.1%.

The all-important core inflation reading fell to 3.3% y/y from 3.4% (exp: 3.4%), having risen just 0.1% m/m in June. This is below the expectation of 0.2% and the previous month's 0.2%.

"The June CPI report was very benign," says Michael Feroli, an economist at JP Morgan. "Within the core component, the long-awaited slowing in both tentants' and owners' equivalent rental inflation took place last month as the monthly increase skitted to low-side 0.3% increases after running around 0.4% increases much of the prior six months."

Elsewhere, airfares and energy prices contributed significant downward pressure.

"The figures add to the body of evidence pointing towards a September rate cut, following last week's softer-than-expected June jobs report, and coming after Chair Powell's Congressional testimony earlier this week, in which Powell struck a more cautious tone, noting how the economy is no longer 'overheated' and that the jobs market is 'fully' back in balance," says Michael Brown, Senior Research Strategist at Pepperstone.

Above: GBP/USD has risen to its highest level since August 2023. Track GBP/USD with your own alerts, find out more here.

"In light of the progress made both in lowering inflation and in cooling the labour market over the past two years, elevated inflation is not the only risk we face," said Powell in an opening statement to a two-day Senate hearing.

His assessment suggests the Fed will ease interest rates before inflation falls back to the 2.0% target. The June figures will make the Fed more comfortable with such a strategy.

The decline in the Dollar reflects a fall in U.S. bond yields that have reacted to the prospect of lower interest rates at the central bank.

"This is exactly what the Fed needs to see," says Kyle Chapman, FX Markets Analyst at Ballinger Group. "The central bank divergence story that has supported the dollar is going to be squeezed quite rapidly, and the greenback will be increasingly vulnerable."

Two-year Treasury yield plunged more than 12 basis points from 4.62% to 4.50% and the US dollar index tumbled to its lowest in five weeks.

These inflation data are the latest in a series of U.S. economic prints that have fallen on the softer side of expectations. Last week's job report revealed a significant downgrade to estimates of U.S. job growth in April and May by 111K. U.S. unemployment rose to 4.1% in June.

It will be this that the Fed will be concerned about going forward now that the disinflation trend is underway again.