Pound, euro's woes are back on speculation Fed will hike rates

[LONDON] The pound and euro slid as the US dollar rallied on speculation that runaway US inflation may push the Federal Reserve to tighten policy.

The euro touched levels near US$1.1450 last seen 16 months ago, while sterling has dropped 1.4 per cent in recent days to break below US$1.34 on Thursday (Nov 11), its weakest since December. Options traders positioned for further losses in both currencies, with sentiment on the pound over the next month reaching its lowest level this year.

Investors are piling into the US dollar, taking a gauge of the greenback to its highest level since November 2020. The market is recalibrating after data showed that US consumer prices rose in October at the fastest annual pace in 3 decades, which helped fuel a sell-off in Treasuries.

Neil Jones, head of foreign-exchange sales to financial institutions at Mizuho Bank, predicted more surprise gains in US inflation into 2022, weighing on both the euro and the pound.

"Supply shortages and constraints will likely ease - nevertheless, my sense is US inflation will prove stickier than anticipated," he said. "This trade is not going away."

The euro's drop saw US corporations selling extensively when it approached US$1.15, while hedge funds had strong appetite for long positions on the greenback after support at that level gave way, according to traders in Europe, who were not authorised to speak publicly and asked not to be identified. Bets on swings in the euro in options show both short and longer-term sentiment is still bearish.

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