GBP/USD Recovers after Data Shows Dip in US Inflation

The Pound to Dollar recovered on Friday after the release of US Inflation and Retail Sales data undershot expectations and raised questions about the strength of the US recovery.

Whilst headline inflation came out in line with expectations, the arguably more important, Core inflation increased by a lower-than-expected 0.1% in April and 1.9% on the previous year.

Headline inflation rose by 0.2% per month and 2.2% per year.

GBP/USD recovered from the 1.2850 post-FOMC lows to highs of 1.2880 at the time of writing, in the ten minutes after the release of the data.

Weakness in the Dollar following the release may be short-lived as inflation continues to remain above its long-term averages.

“The all items index rose 2.2 percent for the 12 months ending April. While a  smaller increase than the 2.4 percent rise for the 12 months ending March, this is still a larger rise than the 1.7 percent average annual increase over the past 10 years,” said the Bureau For Labour Statistics (BLS).

The same could be said about Core inflation.

“The index for all items less food and energy rose 1.9 percent over the
last 12 months; this compares to a 1.8 percent average annual increase over the past decade,” added the BLS.

It did not seem the adjustment down would impact on the Federal Reserve’s decision whether or not to raise interest rates in June.

“US inflation isn't responding yet to a tightening in labour markets, but might still be (barely) hot enough to keep the Fed on a tightening path,” said Avery Shenfield of CIBC economics in response to the data.

Shenfield also mentioned how Retail Sales March figures were revised up offsetting the slightly disappointing result from them.

“Total sales were up 0.4%, but the prior month was revised to a 0.1% gain (vs. -0.2% prev reported),” said the analyst.

Retail Sales had been forecast to rise by 0.6%.

Sales less cars and petrol, meanwhile, increased by 0.3% versus the 0.4% of the previous year.

“Core sales have run at 3.2% annualized rate in the last 3-months, but these days, we may be getting more leadership from services consumption. All told, a mixed set of data, but the tame inflation reading will be supportive for bonds today,” concluded Shenfield.

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