The US Dollar was sold heavily yesterday afternoon following weaker-than-expected US inflation data.

Although the data only slightly missed expectations (0.1% lower on year-on-year, month-on-month and core estimates), it was enough for markets to seemingly rule out the chances of any further rate hikes from the Federal Reserve. In fact, markets are now pricing in the first US rate cut to happen around May next year instead. This shift in interest rate expectations has caused a move out of the USD and triggered a sharp move lower in long term Treasury yields.

As a result, the GBP/USD rallied more than 2-cents and it currently trades around a 2-mth high. The EUR/USD rate jumped around 1.5 cents higher and trades around a 10-week high. Whether this weakness in the USD will continue remains to be seen. However, the data only missed by a small amount and was mainly down to a drop in energy prices, so the fallout from this has been quite surprising. Furthermore, US Core inflation remains around double the Federal Reserve’s target and their recent communications continue to signal they’re not going to be cutting rates before it returns to those target levels.

In other news, UK inflation data out this morning also showed a lower reading than expected. This showed annual inflation in October dropping to a 2-year low at 4.6% versus an expected 4.8%. This is a steep drop from the previous month (6.7% - Sept) and is largely being attributed to a reduction in household energy bills. The data hasn’t had any major impact on Sterling this morning, however, as investors already believe the Bank of England are done with hiking rates and this is just further confirmation of these suspicions.

It doesn’t feel like we’re quite at the end of this inflation story though and there could be some further twists down the road. One thing is for sure though and that is the key economic data releases are likely to continue attracting a lot of attention as investors seek to confirm or reject their current beliefs on where interest rates are heading. Next up we have this afternoon US retail sales figures and then UK retail sales figures on Friday morning.

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