Pound-Dollar Exchange Rate Above 1.2750 As Dollar Retreats After Inflation-Data Relief

Risk appetite rallied following the latest US inflation data while the US Dollar lost ground.

The Pound to Dollar (GBP/USD) exchange rate rallied to around 1.2760 area after finding support at the 1.2700 level.

However, the Pound to Euro (GBP/EUR) exchange rate retreated to 1.1730 after stronger-than-expected Euro-Zone inflation data.

In line with consensus forecasts, the US PCE prices index increased 0.3% for April, with the year-on-year rate unchanged at 2.7%.

Core prices increased 0.2% for the month compared with forecasts of 0.3%, although the annual rate met expectations with an unchanged rate of 2.8%.

There had been some concerns that the monthly rate would be stronger than expected and reinforce fears over US inflation trends.

There was, therefore, an element of relief surrounding the 0.2% increase for the month.

ING commented; “we need to see it consistently hit 0.17% month-on-month to bring inflation down to 2% year-on-year, so it does remain too hot, but the momentum is encouraging after some early 2024 disappointment.”

It added; “Overall it is modestly supportive of a September rate cut, but we need to see at least two more 0.2% prints between now and then, further evidence of cooling consumer spending and the unemployment rate moving higher to perhaps the 4.2% region. All possible, but not guaranteed.”

According to Michael Lorizio, Senior Fixed Income Trader at Manulife; “This is one of the rare instances where all of the modeling and all of the forecasting really nailed where the actual measured data ended up coming.”

He added; “This is basically exactly what the Fed has detailed. This is a favorable report showing that core is slowing and perhaps some of that seasonality that they have identified that has come in the first quarter of the year is coming off, and now we’re resuming the slowing that we saw in the second half of last year.”

According to Scotiabank; “spot is still consolidating after the early week rejection of the 1.28 area. With the USD looking a little softer overall, however, losses should hold around 1.27 on the day.”

GBP/USD needs to break above 1.2800 to gather any significant momentum.

The headline Euro-Zone inflation rate increased to 2.6% for May from 2.4% and slightly above consensus forecasts of 2.5%.

The core rate increased to 2.9% from 2.7% and above market expectations of 2.7%.

The ECB will inevitably remain sensitive to inflation developments.

There are very strong expectations that the ECB will cut interest rates at the June meeting with a 25 basis-point cut to 4.25%.

ING commented; “With an entire choir of ECB Governing Council members once again singing about rate cuts, anything other than a cut of 25bp next week would be a major surprise, not to mention a severe reputation loss for the central bank.”

It added; “In the past, rate-cut cycles were mainly triggered by either a recession or a crisis. Fortunately, none of these is currently threatening the eurozone economy. Consequently, there is no pressing need for the ECB to cut rates or to engage in a longer series of rate cuts. Instead, the ECB will cut rates not so much because it has to, but simply because it can.”

According to Scotiabank; “A modest downside miss might rekindle thoughts of an earlier Fed cut, with pricing now reflecting the first full 25bps ease not coming before December.”

As far as UK data is concerned, the Lloyds Bank business confidence data posted a strong advance for May to an 8-year high.

Nationwide also reported a 0.4% increase in house prices for May with a 1.6% annual increase.

There was, however, a small decline in mortgage approvals to 61,100 for April from a revised 61,300 the previous month.

In this context, global developments dominated Pound moves.