GBP/USD Rate Races to March Highs Following U.S. Inflation Undershoot

Image: Giuseppe Milo, CC BY 2.0. Source.

The Dollar was sold widely and stock markets rallied after U.S. inflation printed below expectations.

The Pound to Dollar exchange rate raced to its highest level since March at 1.2825 following news U.S. CPI was at 0.0% month-on-month in April said the BLS, down from 0.3% in March and below the consensus expectation for 0.1.

The core CPI inflation reading fell to 0.2% from 0.3%, which is below the expected level of 0.3% and the lowest print since 2021.

These data raise the likelihood of Federal Reserve interest rate cuts, which are typically held to be supportive of investor risk sentiment (good for stocks) but pose headwinds for the Dollar. Markets now price two interest rate cuts for 2024, beginning in September, followed by another 25bp reduction in December.

These inflation figures come just hours ahead of the Federal Reserve's interest rate policy update and lessen the odds of the Fed striking a 'hawkish' tone, i.e. one that pushes back on the prospects of interest rate cut expectations.

The flat headline inflation reading has a fall in gasoline prices to thank, while core inflation cooled thanks to a halt in a strong run of auto insurance price rises.

That said, shelter remains a driver of inflation, rising 0.4% monthly, making housing costs the biggest contributor to overall inflation pressures.

"Short-term Treasury yields are plunging, with both 2- and 10-year instruments pushing lower as investors raise odds on two rate cuts coming before year end. The dollar is reversing its gains, equity markets are rallying and risk-sensitive currencies are climbing," says Karl Schamotta, Chief Market Strategist at Corpay.