In the past 24 hours we have seen a significant swing for cable (GBP/USD) with the high/low range from 1.4095 to 1.38 or just over a 2% spread. Much of the movement came following yesterday afternoons inflation data which in fact was stronger than expected.
Normally if you see inflation rise this would prompt the value of a currency to strengthen and indeed the initial reaction followed this trend was for dollar strength. Rising inflation would normally mean that a central bank may look to raise interest rates to stop inflation from rising too high, with yesterdays higher reading it suggested to the market that the Fed will continue its stance with regards raising interest rates throughout 2018.
Why did the dollar weaken?
Under normal circumstances the dollar should have strengthened yesterday but has now fallen nearly 3 cents since the release. This highlights how fickle the market can be.
“From a longer-term perspective markets remain uninspired by the US economic prospects and the USD. Effectively markets continue trading the end of the US economic cycle where any near-term acceleration in inflation may trigger more Fed tightening but will also bring forward the next downturn,” says Manuel Oliveri, a FX strategist at Crédit Agricole in London.
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