Daily Forex Market Report 14-Dec-2022: Sterling rallies against the US Dollar as selling pressure hits greenback, EURO continues to run hot

The US Dollar Index (DXY) is facing selling pressure following yesterday’s surprisingly soft inflation reading.

Coming in a 7.1%, year-on-year (YoY) inflation beat expectations of 7.3%, causing a rally on equities and investors weighed up the prospect of a looser economic policy from the Federal Reserve.

DXY finished the Tuesday session one percent lower at 103.59 and has remained there so far this morning.

Cable pounced on the weaker greenback, soaring to six-month highs of 1.244 before cutting back around 90 basis points before session’s close.

As of now, Cable is changing hands at 1.235, as the pound contends with its own selling pressure given that UK inflation data also came in softer than expected

The rallying GBP/USD pair underscores greenback’s selling pressure – Source: capital.com

Today’s reading underscored a YoY rate of 10.7%, beating estimates of 10.9%, with retail prices falling sharply against the month (although by slightly less than expected).

Core inflation (which excludes food and energy from the basket) finished at 6.3% against a 6.5% forecast.

Peak inflation might be behind us, but with UK 10-year gilts dropping to their lowest price in a month (at 3.3%, yields have jumped nearly 30 basis point in the past week), the market clearly expects a degree of hawkishness from the Bank of England in the short term.

In the eurozone, where inflation remains stickier than in the US and UK, analysts are weighing up the potential for a surprise jumbo hike in today’s interest rate decision from the European Central Bank.

That would cause a rally on the euro, which is already running hot. EUR/USD closed 0.8% higher yesterday at 1.062 yesterday, prices not seen since early June.

Price action in the EUR/GBP pair is more muted, having remained in the 86p ballpark since the start of December.

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Employment data also failed to impress, while the goods trade balance widened its deficit more than expected.

As such, Federal Reserve chair signalled a slower pace of interest rate hikes in the months to come.

"It makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down,” said Powell, though he did note that the terminal rate could be "somewhat higher" than the 4.6% indicated by in the September projections.

EUR/GBP closed the Wednesday session at .863, around 12 basis points below the intraday high, though the euro has the slight upper hand this morning having added a few pips.

Yesterday’s EU headline inflation data came in at a flat 10% against a 10.3% forecast, though that figure is still unacceptable high given the 2% target, so excessive rate hikes are likely to stay on the agenda in the coming months.

Combined with Powell’s dovish overtures, EUR/USD jumped a full percentage point to 1.042 yesterday, and continued to rally another 0.33% to 1.045 in today’s Asia window.

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