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The Pound to Dollar exchange rate (GBPUSD) rallied to hit the psychologically important level of 1.30 following the release of data that showed a sharp decline in U.S. inflation that eases pressure on the U.S. Federal Reserve to raise interest rates beyond July's anticipated hike.
The rally in GBPUSD is notable as the last time the 1.30 milestone was quoted was in April 2022 when the exchange rate was headed in the opposite direction.
The headlines from the BLS were indicative of a rapid cooling in inflationary pressures in the world's largest economy, however, the slower declines in core inflation readings mean the Federal Reserve will not be dissuaded from raising interest rates on at least one more occasion:
♦ Core CPI y/y June: 4.8%, the estimate: 5.0%, previous: 5.3%
♦ Core CPI m/m June: 0.2%, the estimate: 0.3%, previous: 0.4%
♦ CPI y/y June: 3.0%, the estimate: 3.1%, previous: 4.0%
♦ CPI m/m June: 0.2%, the estimate: 0.3%, previous: 0.1%
"That drop was helped by base effects, as a strong year-ago increase dropped out of the calculation," says Katherine Judge, an economist at CIBC Capital Markets.
Following the inflation release the Pound to Dollar exchange rate rallied back to 1.2955 having been trending lower through the course of the day.
The Euro to Dollar rate extended its advance by half a percent to 1.1062. The Dollar was lower against the majority of its G10 peers as U.S. bond yields slid in recognition that the Federal Reserve can begin to feel it is getting the upper hand on inflation.
"Encouragingly for the Fed, there was relief in policymakers' preferred measure which tracks core services ex. rent of shelter prices, and is a better gauge of underlying price pressures tied to demand. That measure showed a -0.01% m/m pace in June, a sign that past rate hikes are starting to work to cool inflation," says Judge.
Expectations for cooling inflation bolstered demand for U.S. Treasury bonds, which in turn diminished the yield they offer; the 2-year yield eased further south of the symbolic 5% barrier.
"The response in US Treasuries to today’s inflation report resulted in the dollar extending its post-payrolls decline," says Simon Harvey, Head of FX Analysis at Monex Europe.
The post-CPI weakness in the Dollar comes as GBPUSD looks to extend its multi-month rally towards, and potentially through, the 1.30 level.
"Benign CPI could unlock a leg lower in the dollar," says Chris Turner, Global Head of Markets at ING Bank N.V. "US CPI will determine whether GBP/USD dramatically trades through 1.3000."
However, analysts and technical studies reveal the Pound is somewhat overbought at this juncture and Sterling bulls might have to wait for the market to settle before renewed buying interest can establish.
Turner says taking out 1.30 "will be tough" for Pound Sterling which is starting to look extended following its recent rally.
"It is probably better to stay cautious here and after a good rally so far this month, 1.30 could be difficult to break," he says.