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The Pound to Dollar exchange rate sliced through 1.27 after U.S. inflation rose in October.
The Dollar resumed its assault against all its peers after headline U.S. CPI inflation rose 0.2% month-on-month in October, taking the year-on-year rate to 2.6% from 2.4% in September.
"The lack of additional progress in measured inflation over the past few months points to the Fed proceeding with monetary policy easing more slowly in the near term," says Sarah House, an economist at Wells Fargo.
Core CPI rose 0.3% for a third straight month, with the three-month annualised rate of 3.6% running faster than the 12-month rate of 3.3%. The three-month rolling average in the Fed's "super-core" measure (core services ex-home rents) accelerated to an annualised 4.3%.
"Today’s CPI reading has supported the dollar and given it fresh impetus to move higher, while a drop to parity for the euro against the dollar is being openly talked about once more," says Chris Beauchamp, Chief Market Analyst at IG. "Trump’s election has only increased the appeal of all things US, and while stocks have taken something of a breather this week, there seems no stopping the dollar."
USD strength reflects fading expectations for the quantum of interest rate cuts to come from the Federal Reserve as investors brace for inflation to remain above the Fed's 2.0% target for an extended period.
"Inflation data over the past few months have not shown much additional progress, and the election outcome has raised new questions about the path ahead for price growth," says House.
The Dollar has risen for seven weeks in succession, boosted by a run of above-consensus inflation numbers. Expectations for inflation to rise in 2025 have also increased following Donald Trump's win in last week's presidential election.
Although these inflation data reveal a pick up in price pressures, economists anticipate the Fed to cut interest rates again in December.
"Inflation has still slowed from where it was earlier this year, and (gradually) softening labour markets argue interest rates are higher than they need to be to get price growth fully and sustainably back to the Fed's 2% objective," says Nathan Janzen, Assistant Chief Economist at Royal Bank of Canada.
The December rate cut has long been in the price and was never in question, but markets are looking beyond December to what happens next year. It is here where there has been a notable reduction in rate cut expectations.
"Our own base-case projections expect 25 basis point rate cuts to the fed funds range in December and January, and then a pause for the rest of 2025 at a 4% to 4.25% range," says Janzen.
Higher-for-longer interest rates spells for a higher-for-longer U.S. Dollar.