Inflation data causing USD weakness

USD

The dollar fell to nine-month lows against the euro after data showed inflation is easing. As inflation is starting to fall this indicates that the Federal Reserve is less likely to increase interest rates as aggressively moving forward. Markets are now pricing in a 25 basis points interest rates rise at the next policy meeting.

Inflation year-on-year fell to 6.5% from 7.1%, which was in line with expectations. Month-on-month CPI data to December fell to -0.1% from a previous 0.1%. Core inflation which excludes fuel and food rose to 0.3% in December, rising 0.1% from November, but year-on year-core inflation fell to 5.7% from 6%.

Core inflation is the reading the Fed looks at closely when deciding whether to continue to raise interest rates. With figures falling, it is likely that the central bank will be cautious when increasing interest rates thus possibly causing the dollar to weaken.

In summary, the dollar fell against all major currencies after the release of inflation data which suggests that further weakness could be on the cards. The Fed will look to change their policy moving forward but stated its decisions will be data-dependent.

GBP

The pound remains well-supported against the US dollar after the release of US inflation data, but remains under pressure against the euro.

Friday morning saw the first major data release for the UK – GDP grew unexpectedly in November, beating market expectations of -0.2%. This means the UK is likely to avoid a recession in the last quarter of 2022.

Although growth still remains low, the recent fears of recession can be eased with this data release. The data was not enough to help the pound gain against the European currency as more downside is likely for the GBP/EUR pair. There’s currently a boost in market sentiment towards the Eurozone’s single currency being supported by falling gas prices.

Key announcements

07:00 – GBP – GDP m/m – Actual 0.1% from previous 0.5%