July 17, 2024

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Dollar Soars as Rate Cut Bets Ease, Pound Jumps on Inflation Surprise

On Wednesday, the dollar reached a one-month high against a basket of its peers, as the safe haven benefited from a drop in sentiment caused by soft Chinese data and global rate setters arguing against imminent cuts, while sterling rose due to higher British inflation.

The dollar index rose to 103.58, its highest level since December 13, extending gains from a 0.67% increase on Tuesday.

That jump was fueled in part by the Federal Reserve’s Christopher Waller, who stated that while the United States is “within striking distance” of the Fed’s 2% inflation target, the Fed should not rush to cut its benchmark interest rate until it is clear that lower inflation will be sustained.

According to CME’s FedWatch Tool, market expectations of a rate cut in March have dropped to around a 60% chance, down from about a 75% view the previous session, and U.S. yields have increased.

Data showed that China’s economy grew 5.2% in 2023, slightly more than the official target, but the recovery was far shakier than many analysts and investors anticipated. Some December indicators, released alongside the GDP data, were bleaker, implying that the country’s long-running property crisis is worsening.

That weighed on Asian and European stocks, as well as the overall market mood.

“A combination of weaker China data and pushback from both ECB and Fed officials against early easing is weighing on risk sentiment and supporting the dollar,” said Chris Turner, global head of markets at ING.

“It is hard to see that sentiment changing today should US December retail sales come in on the strong side.”

The data is due at 1330 GMT and will provide the most recent indication of the health of the US economy.

Investor bets on ECB rate cuts are excessive and potentially counterproductive because they could stymie monetary easing, Dutch central bank chief Klaas Knot told CNBC on Wednesday.

The pound rose 0.1% against the dollar to $1.2646, as higher British inflation data reinforced market expectations that the Bank of England will be slower to cut interest rates than other central banks.

The data “supports our view that while price growth is set to slow faster than the BoE had anticipated, continued economic resilience will prevent inflation from cooling at a rate that would justify rate cuts in the first half of this year,” said Nick Rees, FX Market Analyst at Monex Europe.

He stated that this would be beneficial to the pound and “is likely to play out most clearly on crosses, particularly against the euro, as is visible in the market response to today’s data.”

The euro hit a one-month low against the pound and was last down 0.15% at 85.93 pence. The pound also rose 0.8% against the Australian dollar, reaching a four-month high.

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