Above: File image of Governor Waller. Image: Federal Reserve.
The dollar's advance against the pound can extend if Fed officials follow Governor Waller in treating a third hot inflation reading as grounds for a larger December hike.
The dollar is advancing against the pound after U.S. inflation came in hotter than expected for a third consecutive month, putting a December Federal Reserve hike beyond reasonable doubt.
The Bureau of Labor Statistics said consumer prices rose 0.4% in October, against a consensus of 0.3%.
"Traders are doubling down on monetary tightening bets, Treasury yields are edging higher across the policy-sensitive end of the curve, and the dollar is advancing against all of its major rivals," says Karl Schamotta, Chief Market Strategist at Corpay.
Core prices, which exclude food and energy, rose 0.3%, against expectations for 0.2%.
The reaction was swift: the Pound to Dollar exchange rate fell from above 1.3420 ahead of the 13:30 release to 1.3320, leaving it down 0.9% on the day.
The dollar index, a measure of the currency against a basket of its major peers, rose back above 102.
U.S. stock futures fell after the release, with Nasdaq futures pointing to a 1% decline at the open.
Falling stocks add to the dollar's haven appeal, as Pound Sterling Live reported during last week's AI selloff.
Above: GBP/USD at 15-minute intervals. Image © Pound Sterling Live, chart created with TradingView.
"A rush to price in more rate hikes from the Fed could make it harder for the AI trade to stage a meaningful recovery," says Kathleen Brooks, Research Director at XTB.
Fed Governor Christopher Waller said in a speech on Tuesday morning that he was already leaning towards a 25 basis point hike, "if the October CPI inflation data out later today are similar to the past two monthly readings – with core CPI inflation around 0.3% or even higher – then a stronger policy move may be needed," says Waller.
"Hiking only 25 basis points would put our credibility at risk, a risk I am not eager to take," he adds.
Money markets now treat a December hike as a near certainty, with around a 13% chance attached to a 50 basis point move.
Barclays expects a second hike in January, "the third consecutive upside surprise in core CPI, with inflation running at 0.30% m/m, reinforces the message that underlying price pressures remain firm," says Pooja Sriram, Economist at Barclays.
Two-year Treasury yields, the part of the curve most sensitive to Fed expectations, rose 12 basis points on the day.
"Cross-currency rate differentials are moving against the Canadian dollar, euro, British pound, and Japanese yen alike," says Corpay's Schamotta.
Pound Sterling Live's House View modelling holds that the dollar outperforms when Fed expectations lift two-year yields, and Tuesday's move follows that route.
However, Julius Baer expects the Fed to adopt a more gradual stance after December, with inflation too high but no longer re-accelerating.
U.S. crude has fallen $18 a barrel since the start of November, and XTB says that could slow price growth in the months ahead.
The fall takes GBP/USD beneath its 21-day moving average, the level Pound Sterling Live's Week Ahead Forecast named as the line that would change the near-term outlook.
A daily close beneath it would open the way to support at 1.3302.
For the pound to recover, Thursday's UK GDP figures must beat the 0.7% consensus and revive bets on a December Bank of England hike.
